Cipla is one of the several Indian pharma companies that’s struggling with delayed drug launches caused by extensive regulatory scrutiny by the US Food and Drug Administration (US FDA).
The delayed drugs include high-margin products like the generics of Advair (gAdvair), used to treat conditions caused by asthma, and chemotherapy drug Abraxane (gAbraxane).
The delays are likely to make a hole in the company's earnings in FY24. An update by the management that these drug launches will now be delayed by around 12 months have prompted a slew of earnings downgrades for FY24.
Before we go deeper into this, here's a brief recap of what happened.
What's the fuss about?
The drugmaker's Pithampur manufacturing facility in Indore came under US FDA scrutiny after the regulator issued Form 483 for the unit, with eight observations, in mid-February.
Before this, it was the company's Goa facility that received an OAI (Official Action Indicated) classification from the drug regulator.
The FDA issues a Form 483 when a facility fails to meet good manufacturing standards specified by the drug regulator. In recent times, domestic pharmaceutical companies have experienced heightened scrutiny by the US FDA as physical inspections resumed after the COVID-19 pandemic.
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Approval by the US FDA is crucial for Indian pharmaceutical companies because a significant portion of their revenue comes from sales in the US market.
These regulatory snags are a major negative for Cipla as they threaten to derail the planned launch of gAdvair and gAbraxane, applications for which were filed from these sites.
As for the Pithampur unit, the company informed investors that classification was expected later this month.
"The nature of observations suggests an ‘OAI (Official Action Indicated) classification for the plant thereby delaying gAdvair launch," said Cyndrella Carvalho, pharma research analyst at JM Financial Institutional Securities.
Adding to that, the management also clarified in its earnings call last week that a reinspection of the facility was likely to occur in the third quarter. If the outcome is negative, as most analysts on the Street expect it to be, the company plans to file for Advair from another foreign site, necessitating another round of inspections.
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"Also, as an attempt to de-risk getting stuck in regulatory snags, Cipla will be filing major launches, from two different manufacturing sites," the management said in its earnings call.
The aftermath
As a consequence of the delay in drug launches, Cipla is left with no major upside triggers to its FY24 earnings. Now that is likely to weigh on the drugmaker's performance in the current fiscal year as US revenues suffer.
"FY24 could be a soft year for Cipla because of regulatory issues at Indore and Goa which are pushing back both Abraxane and Advair. On Advair, the market is shrinking by ~7-8 percent annually, so any delay is negative," said Kunal Randeria, director, Nuvama Institutional Research.
"Likewise, we had reduced our FY24 estimates by ~12-13 percent. This was mainly due to delays in the above-mentioned products as well as no new regulatory approvals. Also, albuterol market share loss is sharper than expected," Randeria said.
Carvalho also believes an FY25 launch for gAdvair will lead to lower US growth and consequently lower margins in FY24. While she doesn't see the opportunity to be diminishing, Carvalho does believe that the delayed launch will defer margin expansion and US earnings upgrade prospects for Cipla.
Also Read: Cipla reports 45% jump in Q4 net profit; what should investors do now?
"Delay in gAdvair launch has driven loss of revenue in FY24 and impacts the US outlook materially in FY24. However, gRevlimid will partly offset this loss," Carvalho added. Revlimid is an oral drug that is used for the treatment of multiple myeloma.
Motilal Oswal Financial Services has also cut its FY24 estimates for Cipla factoring in delays in launches, costs related to additional field force in the dosage form segment, remediation measures and adding alternative sites for critical products in the US generics segment.
Adding to the caution, Morgan Stanley has also cut its FY24 Earnings-Per-Share (EPS) estimate for Cipla by 17.1 percent, attributing it to the delays in key product launches.
Long-term growth story intact
Despite the near-term risks, the long term growth story for the pharma company remains intact, analysts say. "Despite the delay in gAbraxane as well, we expect Cipla to post a healthy 19 percent EPS compounded annual growth rate (CAGR) over FY23-25E, making it one of our top picks within the sector. We continue to like Cipla’s sharpened focus on domestic prescription medicines, US generics and strong delivery of cost efficiencies," said Purvi Shah, DVP (fundamental research) and pharma analyst, Kotak Securities.
Prabhudas Lilladher also remains positive on Cipla's growth across key segments including India and the US, given the strong traction in respiratory and other portfolios, potential growth of over 10 percent in domestic formulations and sustainability of current US revenues, backed by prospective key launches over FY25.
Backing the view, Morgan Stanley also has a rosy outlook for the drugmaker from FY25 on account of base business growth and visibility of several big launches from the next fiscal year.
In essence, despite the roadblocks in FY24, Cipla is likely to jump right back onto a solid growth trajectory from FY25.
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