Healthy dose of foreign sales to boost Cipla's fortunes

Overseas foray with front-end presence and a strong product pipeline will help the firm achieve $5-bn revenue target

Through the last two trading sessions, the Cipla stock has been recording fresh all-time highs, outperforming the BSE Healthcare Index, its peer index, since August. The stock is gaining momentum because of the company's plans to aggressively expand abroad, riding on a strong product pipeline, as well as its target to quadruple revenues by 2020.

Given the road map on enhancing revenues and increasing its presence in key markets such as the US, as well as the traction the domestic formulations space has seen, the Street is upgrading its earnings estimates. Analysts at CIMB have raised their FY15 earnings-per-share estimate for Cipla five per cent due to a recovery in Indian business growth and upsides from the recent Rs 2,700-crore acquisition of Medpro. The share of the Africa business is expected to improve from the current 18 per cent to 25 per cent by FY15.

While revenue and earnings growth due to the South African acquisition could be a near-term catalyst, inhaler opportunities in the developed markets may play out in the long term, analysts say.

In recent weeks, one of the key talking points for the company has been its plans to increase revenues from the current Rs 8,000 crore to about Rs 30,000 crore (about $5 billion) through the next seven years. A large part of this growth is expected to be accounted for by the US market, where Cipla plans to increase revenues from the current $200 million to $1 billion. Currently, Europe accounts for sales of about $100 million; this, too, should grow faster.

In the longer term, the company could see substantial upsides from the commercialisation of the inhaler portfolio in regulated markets. While the global respiratory market is worth $34 billion, the launch of Cipla's combination inhaler Advair through the next couple of years could open up a combined US-EU market pegged at $6.5 billion. Given the limited competition, expect high margins from the drug, estimated to generate annual sales of $200 million for the company starting FY16.

Meanwhile, even as the new pricing policy is a negative for the domestic industry, the company estimates revenue impact on domestic sales would be to the tune of just two-three per cent. In July, Cipla outperformed its domestic peers because of a good performance in the anti-infectives and respiratory segments, which together account for about half its domestic revenues.

While the overall pharmaceutical market grew nine per cent in July, Cipla notched up overall sales growth 17 per cent, primarily due to the 14-27 per cent growth in these two segments. Against this backdrop, analysts expect the company's earnings to rise 22 per cent in FY15 and another 19 per cent in FY16, far higher than the 10 per cent they expect for this year. And, at the current price of Rs 440, the analysts have an outperform rating on the stock, which is trading at 18 times its FY15 estimates.