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MOSL: . CIPLA: Pipeline build-up on track in the Respiratory and Peptide space

One-India strategy driving steady industry outperformance

• CIPLA delivered a better-than-expected 1QFY23 performance, led by healthy traction in the US and emerging markets, and controlled cost. The strategy of ‘One-India’ (prescription, trade generics, and consumer health) as well as building a Complex Respiratory and Peptide pipeline in the US Generics is progressing well to cater to better business prospects over the next three-to-five years.
• We tweak our FY23/FY24 estimate by +3%/+2%, factoring in: a) healthy outperformance in the Domestic Formulation (DF) segment, and b) steady momentum in the US portfolio. We continue to value CIPLA on a SoTP basis (23x 12M forward earnings for the base business and NPV of INR40 for g-Revlimid) to arrive at our TP of INR950. Even though the outlook remains interesting, with 15% earnings CAGR over FY22-24, we maintain our Neutral rating as the current valuation adequately factors in this earnings upside.

Elevated costs dragged margin on a YoY basis in 1QFY23

• Revenue was stable YoY at INR54b (est. INR54b) in 1QFY23.
• Sales from North America grew 13% YoY to INR11.5b (USD155m; up 10% in CC terms; 22% of sales) due to steady momentum in the Core Formulation business, led by contribution from Respiratory and Peptide assets.
• SAGA/EM sales grew 8%/14% YoY to INR9b/INR7b (15%/13% of sales).
• DF sales declined by 9% YoY to INR25b (46% of sales) due to significant normalization in business from the COVID-19 pandemic. The same grew 9% YoY, excluding business from the pandemic.
• Gross margin was largely stable YoY at 62.3% in 1QFY23.
• EBITDA margin contracted by ~250bp to 21.3% (est. 18.8%) on higher OPEX (staff cost/other expenses up 150bp/100bp YoY as a percentage of sales).
• EBITDA declined by 12% YoY to INR11.4b (est. INR10.1b).
• Other income was higher by 60% YoY to INR1b (est. INR0.6b).
• Adjusted PAT declined by 13% YoY to INR7b (est. INR6b).

Highlights from management commentary

• The management guided at an EBITDA margin of 21-22% in FY23.
• The recently launched Peptide asset has been on track in terms of gaining market share in the US market (i.e. up to mid-teens by the end of CY23).
• It does not have any supply constraint for Lanreotide in the US market.
• Out of the five filings in the Peptide category, none are first-to-file. However, it sees limited competition products, if executed well. The same can provide a business opportunity of USD30-35m per product. The management expects one launch in FY23 and two in the latter part of FY24.
• It expects a USFDA inspection for g-Abraxane soon.
• Adjusting for the forex headwind, and escalated procurement and freight cost, which grew 170bp as a percentage of sales, EBITDA margin stood at 23% in 1QFY23.