Event update: Cipla (Outperformer) - US business gaining momentum

Event

• Over the last week, Cipla has received USFDA ANDA approval for two niche injectable products - Isoproterenol Hydrochloride (gIsuprel) and Testosterone Cypionate (gTestosterone).

Key highlights

• Testosterone Cypionate Injection 100/200mg/ml (Pharmacia and Upjohn’s Depo’s – gTestosterone; market size - US$191m) is indicated for the treatment of deficiency/absence of endogenous testosterone in males. Currently, there are 4 active generic players, but they have only 40% market share while the innovator, Pfizer, continues to hold ~60% market share. We see significant opportunity for Cipla’s growth and market share gain in the niche injectable drug and estimate at least US$10-15m annualized revenues from this drug, if the company succeeds in capturing 10-15% market share, with likely further upsides.
• Isoproterenol Hydrochloride Injection USP, 0.2mg/mL (Hospira Inc’s gIsuprel; market size - US$148m) is indicated for the treatment of mild/transient episodes of heart block. Cipla will be the 2^nd generic in the market; currently, the market is dominated by the sole existing generic, Nexus Pharma. Assuming 30-35% market share with 40-50% price erosion, this could be US$20-25m annualized opportunity for Cipla, until the entry of incremental competition.
• These niche injectable product approvals (in-line with management guidance of one niche launch in the US every quarter) are quite meaningful, given Cipla’s relatively low US base (~US$400m in FY18). They add comfort on Cipla’s ability to grow its US business at a rate faster than most large peers.

Valuations & view

With flat profits over FY13-17 at ~Rs15bn, Cipla reported ‘below potential’ earnings for a prolonged period, as revenue growth failed to match aggressive growth investments. Signs of profitability turnaround were visible in FY18 with change in strategy and management. Scale-up in the US business through the launch of niche ANDAs should add to this momentum. Over the medium term, we expect Cipla’s relatively small US business (~$385m in FY18) to grow briskly as on-going R&D investments in developing complex drugs including multiple inhalation products begin to yield results. This will complement the steady profitability growth in Cipla’s sturdy domestic formulations franchise. We estimate 20% EPS CAGR over FY18-20E, as Cipla capitalizes on its ‘underleveraged’ R&D capabilities. Maintain Outperformer with a price target of Rs639.