Graphic by Satish Kumar/Mint
Graphic by Satish Kumar/Mint

Cipla stock takes a knock on US FDA observations, overhang to continue

  • The Goa plant accounts for 20% of Cipla’s US sales; hence, any serious observation by the FDA could slash sales there
  • On the other hand, analysts have not been banking too much on its domestic business recently

Investors in Cipla Ltd’s stock has been on a downhill journey in the past year. The stock has tumbled from 52-week highs a year ago to 52-week lows at present. In the process, investors lost about 35%. Now, further compounding its woes is the news that the US Food and Drug Administration (US FDA) has made further observations regarding its Goa plant. The stock saw additional selling on Monday, falling 3.6%.

While additional details of these observations are yet to be known, there were about 12 observations regarding the Goa plant. But whether there are serious discrepancies or the issues can be resolved quickly will be known only after US FDA provides a detailed Form 483. As such, these observations could delay new approvals in the US from this plant.

In the past though, Cipla has successfully resolved US FDA’s queries in about two-four months. “If the observations are cleared quickly, the pipeline of new approvals and launches in the US market should continue. If there are serious observations then there is a possibility of getting OAI (Official Action Indicated) where chances of getting warning letters are high. In that case new approvals could be impacted from the said facility. As per company, there were no data integrity related issues, hence no possibility of import alerts" said an analyst on condition of anonymity.

The Goa plant accounts for about 20% of its US sales, hence, any serious observation could slash sales there. Overall, the US business accounts for about 21% of its sales, and they have been improving this past year due to the launches.

Besides, Cipla has a rich pipeline of launches slated for the US in the next 12-18 months. “US revenues were strong over the past two quarters due to the launch of generic Sensipar ($35mn-40mn a quarter). However, this will come down substantially as several others have launched it and intense competition would make it a normal product. Base US sales are currently US$125mn a quarter and we expect this to improve to US$140mn in FY21 on the launch of 10-15 products and of limited-competition products such as Albuterol, Truvada, Latuda, etc. over the next 12-18 months," analysts at ICICI Securities Ltd said in a recent note to clients.

On the other hand, analysts have not been banking too much on its domestic business recently. That’s because Cipla has been realigning the number of distributors in the trade generic segment. This resulted in its Q1 FY20 domestic revenues shrinking about 12% year-on-year. Analysts reckon that the domestic-market restructuring could continue for a couple of quarters.

As such, much depends on growth in the US markets for now. Only a quick resolution to US FDA’s issues would help stem the fall in the company’s stock price.