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Home / Markets / Mark To Market /  An unexpected American booster for Cipla

Investors gave a thumbs-up to Cipla Ltd’s announcement on Saturday that it had received the final approval for its Lanreotide depot injection in the US. Unsurprisingly, on Monday, when the broader markets were in mayhem, the Cipla stock was up nearly 4% vis-à-vis the 2% fall in the Nifty 50 index.

The development improves the prospects of Cipla’s earnings performance. Commenting on the approval, analysts from Nomura Financial Advisory and Securities (India) said: “Given strong volume growth and the lack of competition, this is likely to emerge as a meaningful opportunity for Cipla in the near-to-medium term." The brokerage maintained that the approval is a positive surprise and was not factored explicitly into its earnings estimates.

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As such, the product size is expected to lead to earnings upgrades. According to Cipla, the active ingredient route of administration and strengths of Lanreotide depot are the same as Somatuline Depot®, from Ipsen Biopharmaceuticals Inc. Furthermore, data from IQVIA shows that Somatuline had US sales of approximately $867 million for the 12-month period ended October.

Cipla has developed this limited competition product along with its partners. Currently, there are no generics available in the US markets for the product. Thus, market share gains are expected to be high. As a result, Cipla is likely to enjoy a good margin profile, which in turn, should contribute well to its profits.

Assuming 30-50% price erosion and 10-20% market share, the annual sales for Cipla can be $50-75 million, as per Nomura estimates. Expecting 60-65% gross margin (accounting for profit share/royalty with partners), Nomura estimates net earnings contribution of $25-35 million, which translates into earnings per share of 2.4-3.1, which is 6-8% of Nomura’s current FY23 earnings per share estimate of 39.7. Cipla’s market share gain can be aided by the fact that the product is administered in clinics (not self-administered) and it is a growing market, said Nomura analysts.

To be sure, competitive intensity can be expected in due course. For now, though, the launch of the product adds to Cipla’s strong US prospects. Note that the launch of the generics of Albuterol inhaler last year has already boosted its US sales significantly. The developing respiratory pipeline for the US markets would further help.

Among the awaited product launches in FY23 include products such as generics of inhaler Advair, oncology treatment Abraxane and multiple myeloma drug Revlimid. These are expected to drive meaningful US sales growth over the next 18-24 months. As such, the launch of the drugs would be paramount given the high base in the US business now.

Domestic sales are also a big contributor to Cipla’s revenues, accounting for about half of overall sales in the September quarter. Here, the company has benefited immensely from its strong product range for covid treatment, which included products such as remdesivir. This had led to strong growth momentum in domestic sales for Cipla last year.

True, the company reported robust growth of 68.5% year-on-year growth in domestic sales in Q1. However, analysts said domestic growth rate is likely to have peaked in Q1 as the base has become high while covid drug sales are on a decline. In Q2, domestic sales grew at a slower pace of 15.6% year-on-year. However, growth is likely to taper over the subsequent quarters. In a report on 11 December, Emkay Global Financial Services Ltd indicated that Cipla’s secondary sales in November grew 7% year-on-year, the slowest pace among their coverage universe.

Perhaps, it is the tepid domestic growth expectations that can explain the 11% decline in Cipla’s shares from their 52-week high on 29 September. This also caps the year-to-date gains for Cipla’s investors to about 9%.

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