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Niche products in North America fuel earnings growth

g-Advair gets delayed further due to queries by the USFDA

* CIPLA reported a miss on 3QFY23 earnings, led by a decline in SAGA/API business. Having said this, CIPLA posted the highest quarterly EBITDA margin since FY17, led by improved traction from the niche launches in North America (NA) and industry outperformance in domestic formulation (DF)

* We cut our EPS estimates by 5.0%/5.5%/5.5% for FY23/FY24/FY25 to factor in: a) a delay in approval of g-Advair, b) heightened competition in South Africa (SA)’s tender business, and c) supply challenges in SA’s private market. We value CIPLA at 23x 12M forward earnings and add an NPV of INR40 related to g-Revlimid to arrive at our TP of INR1,110.

* We expect 11% earnings CAGR over FY23-25 aided by: a) differentiated respiratory/peptide product pipeline for the US market, b) better-thanindustry growth in chronic portfolio in the DF and branded segments in SA, and c) a gradual improvement in profitability in the consumer health segment. Considering the earnings growth and valuations, which provide limited upside from current levels, we retain our Neutral rating on the stock.

Superior product mix partly offset by lower operating leverage

* CIPLA’s 3QFY23 revenue grew 6% YoY to INR58b (our est: INR64b).

* DF sales grew marginally by 2% YoY (11% YoY ex-Covid) to INR25.6b (44% of sales). The US sales rose 39% YoY to INR16b (28% of sales) and reported the highest ever quarterly revenue of USD195m (+30% YoY). SA sales declined 22% YoY to INR7b (12% of sales). EM sales grew 7% YoY to INR7.6b (13% of sales). API sales (3% of sales) dipped 11% YoY to INR1.5b during the quarter.

* Gross margin expanded 460bp YoY to 65.5% (our est. 65%) fueled by higher contribution from niche products.

* However, EBITDA margin expanded at a lower rate of 170bp YoY to 24.2% (our est. 25.1%), due to higher R&D spends/other expenses (+150bp/100bp YoY as % of sales).

* EBITDA increased 14% YoY to INR14b (our est. INR16b) in 3QFY23.

* Adj. for one-time reversal of deferred tax, PAT increased 20% YoY to INR8.8b (our est. INR10b) due to higher depreciation and tax rate for the quarter.

* During 9MFY23, sales/EBITDA/PAT grew 3.4%/5.0%/5.0% to INR170b/ INR39b/INR23b, respectively.

Highlights from the management commentary

* Management maintained its guidance of 21-22% EBITDA margin for FY23.

* While CIPLA achieved the highest ever quarterly US sales run-rate, the gRevlimid sales was marginally lower QoQ.

* The revised target action date for g-Advair is in Apr’23. The company is addressing queries raised by the USFDA on g-Advair.

* The market share ramp-up of g-Leuprolide acetate injection is likely to be gradual given that there are 2-3 competitors for the product.

* With respect to G-Abraxane, CIPLA indicated the likely approval in 2HFY24E.

* Management indicated one peptide products approval in Sep’23E, which would be similar to g-Advair/g-Abraxane in terms of opportunity.

* The chronic/acute share in prescription domestic formulation segment is 60:40. The acute segment has grown at 6% YoY, while chronic segment has grown at healthy mid-teens for the quarter.

* CIPLA is developing two biosimilars. The timeline for launch in semi-regulated market is about 3-4 years and in regulated market it is about 5-6 years.

* Ex-Covid, the domestic formulation sales growth was 11% YoY for the quarter.

Other highlights

* SA sales declined YoY for the quarter due to supply challenges and reduced tender business.

* CIPLA has net cash of INR52b at the end of 3QFY23

* The company has 74 ANDAs pending for approvals at the end of 3QFY23.

* Management indicated about inventory normalization, enabling better growth prospects in the emerging market.

Interesting product pipeline to drive growth in mid-to-long term

The US market to be driven by growing traction in existing products and niche pipeline

* In 9MFY23, the US sales grew 30% YoY (USD529m; up 22% in constant currency (CC) terms) to INR42b. This was led by niche launches and better traction in launched products (g-Revlimid/g-Lanreotide). The YoY growth is commendable given the ongoing price erosion in the base business.

* While the improved market share of such products is likely to further drive the US sales, CIPLA has also added products such as g-Leuprolide to the portfolio.

* Having said this, there are certain products (g-Advair/g-Abraxane) that are being delayed due to product-specific review/compliance issues at Goa.

* Based on the above factors, we expect the company to deliver 14% US sales CAGR to USD956m over FY23–25.

Core portfolio growth momentum would continue to drive DF business

* In 9MFY23, CIPLA’s domestic sales were flat YoY to INR76b. Adj. for the high base of Covid in 9MFY22, the YoY growth would have been 12% for 9MFY23. CIPLA has exhibited continued momentum in the core portfolio (respiratory, cardiac, and anti-diabetic) driven by new launches.

* In the prescription segment, the chronic therapies like respiratory and antidiabetic have grown much higher than the IPM while the growth in Cardiac/antiinfectives is in line with IPM growth.

* Besides, in the Consumer Healthcare business, the four brands have surpassed the revenue mark of INR1b and registered a 16% growth in 3QFY23 through continued innovation and expansion.

* We expect CIPLA to deliver 8% sales CAGR in DF to INR116b over FY23–25.

SAGA business to be led by SA private market

* In 9MFY23, CIPLA’s SAGA business declined 12% YoY to INR24b. This was due to intense competition in the tender business.

* However, CIPLA continues to grow in the private market with revenue share moving to 79% in 9MFY23 as compared to 75% in 9MFY22. Moreover, in 3QFY23, CIPLA witnessed growth of 9.3% YoY v/s 3.7% YoY growth in the broader prescription market.

* We expect CIPLA to deliver 6.5% sales CAGR in SAGA to INR34b over FY23–25 due to private market share gain offsetting the tender business decline.

Earnings potential already factored in the current valuation

* We cut our EPS estimates by 5.0%/5.5%/5.5% for FY23/FY24/FY25 to factor in: a) a delay in approval of g-Advair, b) heightened competition in South Africa (SA)’s tender business, and c) supply challenges in SA’s private market.

* We expect an 11% earnings CAGR, led by a 14.0%/8.0%/6.5% sales CAGR in the US Generics/DF/SAGA segments over FY23–25, respectively.

* The earnings CAGR will be led by: a) differentiated respiratory/peptide product pipeline for the US market, b) better-than- industry growth in chronic portfolio in the DF and branded segments in SA, and c) a gradual improvement in profitability in the consumer health segment.

* We value CIPLA at 23x 12M forward earnings and add an NPV of INR40 related to g-Revlimid to arrive at our TP of INR1,110.

* Considering the earnings growth and valuations, which provide limited upside from current levels, we retain our Neutral rating on the stock.

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