Cipla: US FDA cloud over Indore plant clears

Cipla’s sales to the US rose by 30% for its base business, although reported US sales declined due to one-off revenues from a high-value product in the year-ago quarter


For Cipla, even if the Indore plant clearance does not immediately contribute to revenues, it sets the stage for a future role.
For Cipla, even if the Indore plant clearance does not immediately contribute to revenues, it sets the stage for a future role.

Cipla’s share barely held its head above water with a gain of 0.22% even as the BSE Healthcare index fell by 1.4% on Thursday. That outperformance, if you can call it that, was due to its Indore facility receiving an all-clear from the US Food Drug Administration (FDA), nearly a year after it flagged deficiencies after an inspection.

This should open up the possibility of Cipla getting approvals for filings made from this plant for the US generic market. At the same time, the company has said in the past that Indore is not the main site for US market filings. “Indore is a newer site comparatively for us, so a lot of our filings may not be from Indore,” said the management in a conference call post-June quarter results.

Why should the stock react at all then? After all, the US is anyway not a material market for Cipla, having contributed to 18% of sales in the June quarter. The company is aiming for a much bigger presence in the US generic market, and that’s why the clearance matters. Cipla’s sales to the US rose by 30% for its base business, although reported US sales declined due to one-off revenues from a high-value product in the year-ago quarter. Even if the Indore plant clearance does not immediately contribute to revenues, it sets the stage for a future role.

It also gives confidence that Cipla has managed to correct the deficiencies to the satisfaction of the regulator. As a Nomura Research note puts it: “...a warning letter could have led to remediation expenses and, more importantly, it would have been inopportune, as Cipla is focusing on expanding its front-end presence in the US.” With the FDA cloud gone, the management may be more forthcoming on plans for the US market, specifically from the Indore plant, in their next conference call.

Cipla’s share has seen ups and downs in the past one year. It’s down by 14.2% over a year ago but has risen by 25% from its low levels of early June. The company has seen a management change, which has raised anticipation of improved performance. Nomura’s note says the management has hinted at a possible 5% reduction in costs, which can improve its profitability by 190 basis points.

In addition, US market growth will go higher due to potential high-value launches in the second half of FY17. The run-up in Cipla’s share from its lows indicates some of this may be priced in unless the execution of its strategy exceeds expectations.

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