We are ‘neutral’ on Cipla as margins are likely to remain subdued for two years with the company increasing R&D spend and personnel costs increasing. Also, consensus is ignoring 5% EPS hit from new ESOPs.
The upside from combination inhalers in the EU and the US has been an option value for Cipla for many years, but in our view, this is still distant. The market’s expectations of an early approval in the US increased after the FDA published its draft guidelines for substitutable Advair generic last month.
However, Teva does not expect a substitutable Advair generic before 2018.
Teva cites the following reasons: (a) despite simpler guidelines in EU (in place for more than four years), no generics available yet; (b) it’s difficult for a generic company to fulfill all FDA requirements in one cycle; and (c) minimum four years are required for filing for a firm, which has already started on the device (and 6-7 years if one starts from scratch).
We note that Mylan stated its intention to file AB-rated generic Advair in CY15 with a launch in CY16. However, these statements were made before publications of FDA guidelines. Thus, in the best case, Cipla may get an approval in the US only in 2018.
The draft guidance presents pathway for a substitutable generic.