Morgan Stanley underweight on Cipla; target Rs 195

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Morgan Stanley has recommended underweight rating on Cipla with target price of Rs 195. The company appeared optimistic on its longer-term growth prospects, as underlined by the hefty USD 250 million capex plan over next two years.

Morgan Stanley report on Cipla:

We attended Cipla's AGM, a once-a-year opportunity to interact with management, and found the team in communicative mood.

Central message

The company appeared optimistic on its longer-term growth prospects, as underlined by the hefty USD 250 million capex plan over next two years. It cautioned that the profits could de-grow in the current year (we are at flat earnings). Cipla mentioned that it is increasingly difficult to grow sales off a high base (Rs 36 billionn F07 sales), and guides for 10-12% sales growth for F2008-09. It is planning a USD 100 million ECB issue. We maintain our Underweight rating on the stock in view of the ongoing earnings deceleration and expect 1-2 more tough quarters ahead.

HFA inhaler pipeline increasing.

Cipla highlighted its HFA inhaler pipeline for the EU markets - 8 products, of which 6 have been filed (2 approved), for which it will get approvals in the ensuing quarters in EU. Budesonide has been approved in Germany, Portugal and Spain; salbutamol in Denmark (UK, Spain and Portugal likely in F08). Cipla is also developing these products for the US market, though launch prospects are distant.

Building technology-intensive portfolio, but US/EU commercialization appears at least 2-3 years away. The company has launched its proprietary transdermal patch for testosterone and estradiol in India; inhaled insulin launch in India is expected soon; and it is building a pipeline of 11 biosimilars in partnership with Avesthagen

Generic Advair launch in UK (USD 300 million mkt) could happen in early 2009 (clinicals done, regulatory submission not done), according to Cipla. Cipla, Ivax, Arrow and Generics UK had earlier (2004) invalidated 2013 combination patent. It is awaiting approval of generic Flonase for its partner for the US launch. US tie-ups span 10 players, 91 ANDAs filed, another 20-25 filings and 10 more launches in F08.