Pharmaceuticals have taken a back seat as pandemic concerns wane, and economic activity ramps up. This is evident in drug maker Cipla’s Covid-19 treatment drug sales which fell by 60% QoQ in Q2FY22. Even with lower demand for Covid-19 drugs, Cipla’s management is heading into the second half of FY22 expecting revenue growth to pick up.

The respiratory drug maker’s cash cow market of the United States now comes into focus as the company’s management and brokerages alike, expect new product launches and market share gains. But concerns on approvals by the US Food and Drugs Administration (FDA) remain. Can Cipla’s growth continue in H2?

Revenue remains firm despite falling Covid-19 drug sales 

In Q2FY22, Cipla’s revenues grew 19.3% YoY to Rs 5,486 crore growth due to higher domestic sales, mainly in the respiratory and antiinfective drugs category. The pharmaceutical company’s net profit was Rs 712 crore, up 73% YoY, but flat on a QoQ basis.

Due to the second wave in India between April to June, the company’s domestic revenues rose by 16% QoQ. This exceptional growth resulted in a near seven percentage points increase in EBITDA margins to 25.8% in Q1FY22 on a QoQ basis. In Q2FY22, with a lower contribution from the high margin Covid-19 drugs portfolio and higher inventory provisions, margins declined by 230 basis points to 23.5%. 

In the Q2FY22 earnings call, Cipla’s management guided for margins of 22-23% in H2FY22. However, input costs concerns remain. Cipla’s Global Chief Financial Officer (Global CFO) Kedar Upadhye said costs of oil, polymers and raw materials sourced from China increased in Q1FY22 and were elevated in Q2FY22. Even if these cost pressures increase in H2FY22 and FY23, Cipla expects to sustain higher margins because of new product launches in the domestic and US market.

India business’ growth slows, but diabetes portfolio receives shot in the arm

The first half of FY22 was expected to be weak on the US front for Cipla, even without the second wave domestically. This is because October to February is the flu season in the US, which leads to higher demand for respiratory drugs required for pulmonary diseases and asthma. In previous quarters, Cipla’s US revenue share of total revenue grew by 2-3 percentage points in Q3 and Q4. India sales typically rose in Q4 and Q1.

In Q2, the momentum in Cipla’s India business was expected to slow down due to falling Covid-19 cases. This led to an 11% QoQ fall in India revenues to Rs 2,416 crore as the sales of the Covid-19 drug declined by 60% in Q2. Less than 5% of quarterly revenues came from sale of Covid-19 drugs.

With cases declining further, the management expects Covid-19 drug sales contribution to its domestic revenue to fall sharply in H2. That said, the management is prepared for a potential third wave as Cipla’s supplies for Covid-19 drugs with hospitals are still stable. 

During the second wave, Cipla was the largest domestic supplier of remdesivir, an antiviral drug used to treat mild to moderate Covid-19 cases. It also distributes molnupiravir, (an oral antiviral drug), baricitinib (a rheumatoid arthritis treatment drug), and antibodies casirivimab and imdevimab in partnership with drug makers MSD Pharmaceuticals, Roche, and Eli Lilly. Even with the expected decline in Covid-19 cases, the outlook for the India business remains strong. Kedar Upadhye said the order flow from acute therapy, chronic therapy, and hospital demand will be stable in H2. 

Cipla’s partnership with US active pharmaceutical ingredient (API) maker Eli Lilly bodes well for the India business. On October 3, Cipla partnered with Eli Lilly’s Indian subsidiary to distribute two insulin drugs Humalog and Trulicity. This will allow the company to tap into the domestic diabetes market and strengthen its chronic therapy portfolio. According to the International Diabetes Foundation, as of 2021, 5.5% of India’s population (7.7 crore people) is affected by diabetes. The management expects to launch Eli Lilly’s diabetes drugs by the end of FY22.

US revenue moderates with higher albuterol market share

Cipla’s US business recorded revenues of Rs 1,055 crore, a flattish growth on both a YoY and a QoQ basis. The sustained US revenues were because of steady sales of its anti-inflammatory and anti-depressant drugs (Diclofenac, Citalopram, Omeprazole). The US market contributed close to 19% of total revenues in Q2, down from 22% of revenues in Q2FY20.

The segment which failed to perform as per expectations was the respiratory segment. Cipla sells the respiratory drug albuterol and its generic version proventil in the US market, but it faced higher competition in the past few quarters. In Q1FY21, Lupin launched albuterol and in March 2021, Sandoz, Swiss pharmaceutical company Novartis’’s subsidiary, launched albuterol. Cipla wrote off inventories worth Rs 241 crore in FY21, to make up for its competitors’ pricing advantage in albuterol.

As Cipla reduced albuterol prices, it gained market share in the US. In Q2FY22, the company’s US market share in albuterol was close to 19%. Lupin’s US market share in albuterol stood at 6-8%.

Cipla’s management expects new launches between Q3FY22 to Q1FY23 in the albuterol market. Cipla will launch generic drugs for Advair (fluticasone propionate and salmeterol), a drug to treat patients with pulmonary diseases. Generic drug launches for Revlimid (used to treat myeloma and myelodysplastic syndromes) and Abraxane (used to treat various types of cancer patients) will also be on its list in H2FY22.

The US FDA issued a warning letter to Cipla for violating manufacturing norms at its Goa facility which makes Abraxane. The management said it’s on track to address these norms. Brokerages suggest if the US FDA clears the facility, the company can step-up its Abraxane production.

However, the management said that Cipla will focus on the US respiratory drugs market to maintain its “lung leadership” position. This will be driven by increasing its market share in albuterol while competitors face challenges on pricing. Inventory write-offs as seen in the previous quarter are unlikely to recur because Cipla’s drugs are priced lower than market peers. While H2FY22 will see a fair few launches, most of the launches will be scheduled for H2FY23. As of Q2FY22, Cipla has 72 pending approvals with the US FDA, two-thirds of them are in the oral solids category.

Growth in SAGA and big capex plans

Cipla’s smaller markets — South Africa, Sub-Saharan Africa, and Cipla Global Access (SAGA), Europe, and emerging markets’ revenues fell by 4% to Rs 1,815 crore due to foreign currency devaluation. However, these markets’ revenues were higher by 30% sequentially as supply chains improved, particularly in Africa. This happened because Cipla secured longer term contracts with distributors which allowed it to navigate the container shortage issues in H1FY22. Cipla increased its market share in the South African private market to 7.3% (from 7.1% in Q1) and in the over the counter (OTC) market to 6.8% (from 6.6% in Q1) as it secured more tenders.

The company’s API division’s revenue fell by 9% YoY to Rs 172 crore and constituted just 3% of Q2FY22 sales(from 5% in Q1).

In Q1FY22, the company earmarked capital expenditure (capex) at Rs 700 crore. In Q2FY22, this was revised to Rs 800-900 crore mainly for maintenance of its existing production facilities. The company said a large chunk of FY23’s capex will be focused on launching new products in the US market. In addition to capex, Cipla increased the research and development (R&D) spend to 5% of sales at Rs 274 crore in Q2, 21% higher YoY.

Cipla’s main Covid-19 drug portfolio over the past six months is not selling. The management expected the same. The domestic respiratory market will not be a key focus in H2 but the company will look to ramp up its diabetes portfolio with the partnership with Eli Lilly. In the US, the company will look to enhance its market share in the main respiratory drug market, and lay the groundwork for several launches expected in FY23. 

With the stock up by 20% since the second wave, investors need to be sure that any upside is not already priced in. Cipla’s trailing 12-month (TTM) price-to-earnings ratio is 28.2 which is below its historic average PE of 34.4, placing it in the buy zone.