The tender business which accounts for ~30% of exports revenue declined 27% YoY, on continuing headwinds from lack of funding by global funds in malaria & ARV, accompanied by pricing pressure amid rising competition.
Cipla reported operationally weak Q1FY20 results as its branded business declined YoY, which was somewhat offset by one-off revenue from Sensipar, wherein other generics were recently launched.
By geography, the branded business declined 12% YoY in India and 7% YoY in South Africa amid challenging market conditions. The tender business which accounts for ~30% of exports revenue declined 27% YoY, on continuing headwinds from lack of funding by global funds in malaria & ARV, accompanied by pricing pressure amid rising competition.
Going forward, management expects the domestic business to normalise in Q3FY20 and South Africa private market performance to offset the weakness in the tender business Q2FY20 onwards. As it stands, branded growth is struggling and margin levers seem to have played out as performance would improve gradually in H2FY20. Maintain ‘hold’ with a target price of Rs 500.
The domestic business declined 12% Y-o-Y as Cipla re-aligned distribution in trade generics (~20% of India sales) and witnessed a dispatch disruption. The tender business (~30% of exports revenue) continues to suffer from pricing pressure. Gross margin (~70%) improved about 600bps due to gSensipar inventory stocking, but Ebitda margin (22.7%) expanded just ~420bps owing to an uptick in other cost items.
Cipla plans to launch the generic version of albuterol at a competitive price in FY20 (since pricing dynamics have not changed much since the recent AG launches). Cipla is looking to invest $150–175 million in its specialty business, including: i) $30 million in MEDRx for tizanidine patch, which will undergo phase III trial; ii) $22 million in Pulmatrix for pulmazole, which will undergo phase II trial; iii) $35 million in Avenue Therapeutics for IV Tramadol, which is undergoing phase III trial; and iv) CTP-354 in partnership with Concert Pharma.
Cipla’s current valuation (22.1x FY21E EPS) seems to be pricing in the slowdown in branded and the increase in specialty investments. Maintain ‘hold/SP’ with a TP of Rs 500 (20x December 2020 EPS).