‘Buy’ on Cipla; firm likely to beat its cost-saving targets

Cipla posted a 6%/4% beat on revenue/Ebitda despite the US revenues being in line. The beat was driven by higher sales in India and Emerging markets. Covid products now account of 5% of India sales and company also saw a healthy uptick in trade generics. Cipla has added Remdesivir capacities with the help of third party manufacturers. Additonally, company is likely to beat its cost saving targets. We upgrade FY21E/22E EPS estimates by 9%/12%. Buy. Top Pick.

Cipla share at 8% of Albuterol market, gradual gains from here. Cipla US revenues were in line with our estimates. On the call, management said that while they have the capacity, they are looking at a sustainable market share with a high inventory at hand. Company pointed to challenges of sustained manufacturing in a complex high volume product. As a result, they have not rushed to grab market share even after Perrigo’s exit. Management didn’t commit to a target market share, but it appears to us that any market share gains from here will be small. As our colleague David Steinberg states here, Perrigo will likely make it back to market in 2021.

From that perspective, it makes sense for Cipla to avoid a market share scramble with Lupin and Perrigo ramping up over next quarters.

US margins have turned around due to Albuterol, now in line with company margins. Previously, company had stated that the US business was at breakeven level. However, Albuterol has provided the company with sustainable profitability, even after factoring in R&D costs. Albuterol HFA inhaler is a fairly competitive category and re-entry of Perrigo will place 6 generics in the market. This will possibly deter further competition given the upfront costs of project including capex and R&D.

Among other product news, Cipla is API supplier to Teva’s gTruvada (First to market, recently launched) but doesn’t consider it to be a large opportunity.