Cipla stock rises on strong launch pipeline, FDA approval for injection

Margin gains and steady growth in the Indian market to support the stock, say analysts.

Amid sell-off across the market, the stock of the fourth-largest Indian health care company by market capitalisation, Cipla, was up 3.8 per cent. The near-term trigger has been a product approval with limited competition in the US market, expectations of higher sales of its Covid portfolio amid rising infections caused by the new variant, and the launch pipeline which is yet to fully factor in the price. 

The primary reason for the gain on Monday was the approval by the US Food and Drug Administration for its Lanreotide injection. The company announced the approval for the drug used in treating and managing hormonal disorders and symptoms of neuroendocrine tumours on Friday after market hours.

The drug is similar to Somatuline Depot of Ipsen Biopharmaceuticals. Somatuline had sales of $867 million for the 12-month period ended October.

A health care analyst at a domestic brokerage says the approval has come as a pleasant surprise, given that the Street was not aware of the (undisclosed) filing and there could be more products lined up.

Injectables are a smaller part of Cipla’s portfolio and the approval expands its presence in this segment. Moreover, the approval boosts confidence about the research and development capability of the company, he adds.

The drug approval has been through the 505(b)(2) route, which, unlike the normal new drug discovery applications, takes less time for approval and is at a lower cost, given the fewer studies required, and offers potential for market exclusivity.

Given that the competitive intensity for Lanreotide is likely to be lower than other generic products, brokerages expect the opportunity from the drug to be sizeable.

Saion Mukherjee and Prateek Mandhana of Nomura Research expect the incremental annual boost to the top line from the drug to be in the $50-75 million range, assuming there is a 30-50 per cent price erosion and a market share of 10-20 per cent. The contribution at the net profit level is expected to be in the $25-35 million range, which would add to the earnings per share (EPS) by up to Rs 3.1. This, according to analysts at Nomura Research, is 6-8 per cent of their 2022-23 (FY23) EPS estimates of Rs 39.7.

While the trend of hospitalisation from the new Omicron variant is lower than the earlier Delta variant, the third-largest drugmaker in the domestic segment, with a market share of 4.9 per cent, could see higher demand for Covid drugs, as well as a respiratory portfolio, if the situation worsens.

CLSA in a recent report indicated that the new coronavirus variants could be short-term opportunities for Indian health care companies.

Cipla, Cadila Healthcare, Dr Reddy’s, and Glenmark Pharmaceuticals had the highest contribution from Covid products in 2020-21 and in the first half of the current financial year (2021-22), according to the brokerage.

While sales of Cipla’s antiviral portfolio were down sharply in November, respiratory, anti-infectives, and cardiac drugs performed strongly, with growth in the 16-19 per cent range.

Analysts at Elara Securities Research are positive on the stock, given the strong respiratory franchise and believe it is well placed to benefit from a fresh surge in Covid cases.

The biggest trigger for the stock are the launches in the second half of FY23. Analysts say generics of the inhaler Advair and cancer drugs Abraxane and Revlimid, and the multiple products in the pipeline are not factored in the stock price.

Analysts at HSBC believe the profitability for its US segment is improving and is currently close to the corporate average, compared to the break-even status a year ago. Further, upcoming big launches and a steady gain in existing products should result in a significant operating leverage, they add.

At the current price, the stock is trading 22x its FY23 earnings estimates and can be considered on dips.