Home Gains Buoy Cipla In Q1 But US Momentum Pivotal
Executive Summary
A strong run on home turf lifted Cipla in Q1, but US momentum with differentiated launches is what investors are keeping a sharp eye on. A China play in the respiratory space is also on the cards for the Indian firm.
Home market gains buoyed Cipla Ltd.’s earnings in the fiscal first quarter ended June 30, with US sales generally flat, but management underscored how the Indian firm has been driving “value-play” in the US through rationalizing certain product categories and ramping up new introductions.
Cipla, which has traditionally deployed a B2B model in the US - where it partnered with firms which then handled sales - has been transitioning to a DTM (direct to market) strategy. While US revenues for the first quarter remained level at about $100m, the DTM business saw significant improvement in gross margin through increased contribution from differentiated launches.
“The sales from new products, including budesonide, decitabine, palonosetron and isoproterenol contributed 30% to our DTM revenues and helped deliver 300 basis points in overall DTM gross margins. This is on expected lines as we move towards a healthier product mix in the US,” Cipla’s managing director and global CEO, Umang Vohra, said at the Q1 earnings call post market hours on August 8.
Cipla’s overall revenues for the first quarter rose 12% to INR39.39bn ($574m) with profits of INR4.51bn (+10%). The company also announced the appointment of Dr. R Ananthanarayanan as Global Chief Operating Officer; until recently he was president and CEO of Teva API and Biologics.
Limited Competition Approvals
Mumbai-based Cipla maintained its guidance of one limited competition product launch in the US every quarter; it is currently tracking ahead of this with seven overall FDA approvals in Q1, including for limited competition products such as isoproterenol HCl and testosterone cypionate injection.
“We are already noticing early signals of a revenue build-up on these products, which has helped us improve our DTM business gross margins,” Vohra observed.
The company filed five ANDAs during the quarter and is on track for over 20 filings in fiscal 2019. (Also see "Cipla Sounds The Bugle On US Respiratory Ambition" - Scrip, 23 May, 2018.)
However, Jefferies analysts said that while Cipla has a strong India/South Africa business, which is seeing steady growth, the key driver going forward will be ramp-up in the US, where execution has been “below expectations”.
“We expect 27% EPS CAGR over FY18-21, though largely dependent on success in the US business, where challenges are rising and visibility is low,” Jefferies equity analyst Piyush Nahar said in an August 8 note.
Cipla, which hopes to grow its US business towards a “billion dollar enterprise”, had earlier indicated that it was taking “a deeper look” into its marketed portfolio there at the “margin level”, and the relative “burden” on its manufacturing and supply chain infrastructure. It aims to build a US business with a healthy profitability profile. (Also see "Cipla Evaluates US Portfolio Tucks, Generic Advair Studies Progress" - Scrip, 8 Feb, 2018.)
Interestingly, like some other Indian firms, it is also keeping an eye on the regulatory changes underway in China with an eye on potential entry plans, though it’s early days still.
“We have a plan to get into China and that's more for the respiratory franchise. I think the Chinese authorities are accepting files which have clinical trials done in the US or Europe and we will capitalize on that,” Vohra said.
China now accepts foreign clinical trial data to support new drug approvals in the country; firms developing treatments for cancer, and rare diseases are among those that stand to particularly benefit.
Market-Beating Performance
Meanwhile, Cipla reported robust growth in the home market in the first quarter, with management commentary staying upbeat around using in-licensing as an effective strategic tool to fill pipeline gaps.
India sales increased by 22% to INR15.44bn in the three months, backed by “market-beating” performance in the respiratory, urology, cardiology and CNS segments. In-licensing and partnering with multinationals for products is expected to stay an important strategic prong for Cipla in the Indian market, where it hopes to achieve sales of $1bn in FY19.
“Because of the patent regime, if we can’t do it [develop products in-house] we have to in-license these products; talk to innovators early on so that they have belief in our ability to create therapies and once we have shown them the ability to create therapies we become the preferred partner of choice,” Vohra said in response to an analyst’s query on pipeline plans five to 10 years out.
The CEO also maintained that Cipla is probably a bit “unique” in India because “we don’t pay incentives to our field”.
“As a result of this some of our partners/multinational partners like this arrangement because it doesn’t induce any kind of practices in the field. I think it’s a mix of a couple of items – it’s building trust with the partners, showing that we can help them shape therapies, providing access to their medicines as well as the governance model of Cipla.” (Also see "Roche Primes New Push Via Cipla For Avastin, Actemra In India " - Scrip, 28 Feb, 2018.)
Cipla launched seven in-licensed products in fiscal 2018, and introduced bevacizumab, trastuzumab and rituximab in partnership with Roche. It also has a partnership with Eli Lilly & Co. to market and distribute insulin glargine injection (Basaglar) in India, among a string of other similar alliances. (Also see "Deal Watch, Focus On Asia: Cipla Licenses India Rights To Lilly’s Basalgar" - Scrip, 19 Jun, 2018.)