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Cipla Ltd.
AGM Highlights: Lite F12,
Mid-Term Drivers Gestating
What's Changed
Price Target Rs336.00 to Rs320.00
FY12e/ FY13e EPS Down 7.8%/ down 7.2%
We view F12 as a year in transition, with a modest
ramp-up in the new Indore facility and limited niche
product opportunities. In view of this, constraints of
the business model (limited leverage to US
opportunities), and full valuations, we retain our EW
rating.
We attended Cipla’s 75
th
AGM – once-a-year chance
to meet management. Overall, Cipla was optimistic
about the industry’s longer-term prospects. It expects
the current $20bn sales (50:50 domestic and exports) to
hit $50bn by 2020 (still at a 50:50 ratio). In the process, it
expects Cipla, too, to grow from current sales of Rs 64bn
to Rs150-200bn by 2020 (implying 9-12% 10-year sales
CAGR). It expects F12 to be the year of stabilization and
consolidation (10% sales growth guidance).
Strategic issues:
1) The niece of Dr. Hamied (CMD), Samina Vaziralli,
has been included in the management team. She
and Kamil (CMD’s nephew, six years in Cipla) will
play a greater role in the company, which should
somewhat address longer-term leadership concerns.
2) Cipla sees US/EU generic opportunities moderating
in the medium to longer term. EM (BRIC, Indonesia,
South Africa, Turkey) provides long-term growth
potential, to be tapped via strategic alliances.
3) Indore facility hasn’t yet received USFDA approval.
4) EU inhalers: Salmeterol HFA (recent approval for
Cipla) has Euro10mn addressable market. Seroflo
launch in EU should happen in two years’ time.
5) Cipla’s US pipeline will provide near-term and
longer-term opportunities.
6) Cipla is focusing on NDDS – devices, nanoparticles,
liposomals; etc. (three ARV NDAs filed in US).
Investment Case: Equal-weight
Earnings Estimates Lowered
We summarize the changes to our Cipla model in Exhibit 1.
F12e EPS cut 7.8%: We have marginally cut our overall sales
assumption by 0.6% (largely exports) and lowered projected
operating margin by 80 bps due to change in revenue mix and
inflationary cost pressures. In addition, we have increased the
effective tax rate to 18% (from 17% earlier).
F13e EPS cut by 7.2%: This largely reflects lower sales and
operating margins base set in F12. We have lowered the top
line by 1.2% and cut operating margins by 100bps. In addition,
we have reduced our interest income assumption and raised
depreciation costs, in view of higher capex plans.
AGM Highlights
Long-term industry outlook: Overall the company was
optimistic about the longer-term prospects of the industry and
expects the current $20bn sales (50:50 domestic and exports)
to grow to $50bn by 2020 (maintaining the 50:50 ratio).
Company outlook: Overall, management expects FY12 to be
a year of consolidation. Specifically, it expects margins to be
maintained at the current levels.
US market: According to management, the company will
benefit from various opportunities (undisclosed), in the near
term as well as in the long term in the US market.
EU inhaler opportunity: Management expects approval of
Seroflo in 2013. The company has not yet finalized its partner.
So far, it has filed for 11 inhaler products in the EU, of which
four are approved. According to the management, in general it
takes about 5-6 years for approval of inhaler products in US/
EU. Salmeterol HFA (recent approval for Cipla) has Euro10mn
addressable market.
Seroflo launch in Russia and South Africa: Cipla has
recorded revenues of about US$2 mln from Seroflo in Russia in
F1Q12. Management expects good sales momentum for
Seroflo in the South African market.
Domestic business: Management expects domestic
business performance to be in line with the market’s growth.
The company is increasing its focus in the rural market. It now
has a total field force of about 7000 medical representatives.
Cipla has leading positions in various therapies including
respiratory care, urology, gynecology, dermatology and
ophthalmology.
African business: Africa is an important segment for Cipla
and because South Africa is the biggest pharmaceutical
market in Africa, Cipla continues to focus on it. It ranks as the
third-largest pharmaceutical company in South Africa.
Instability in Africa/ Middle East: According to management,
if the current unrest in Africa/ Middle East continues, the
company’s business may slow down there.
Strategic alliance for Emerging Markets: According to
management, since it is difficult for a single pharmaceutical
company to expand in various emerging markets
simultaneously, partnerships and strategic alliances would be
a preferable route, including in-licensing of products to fill
therapy gaps and out-licensing to leverage manufacturing
capability.
Biosimilars: Cipla, along with its partners, is working on four
biosimilar products. It plans to launch products from the Indian
facility in 2013.
Capex: The company is now shifting its capex focus on API
manufacturing and R&D activity. Key projects in the near term
include new API unit at Patalganga, new API unit for
anti-cancer at Bengaluru, upgrading at Kurkumbh, Baddi,
Sikkim, Patalganga and Goa and new R&D centre at
Patalganga. Its target is to spend over Rs6bn over the next 1-2
years.
Investments in Meditab Specialty and Goldencross
Pharma: Cipla invested Rs1.9bn in Goldencross Pharma and
Rs1.3bn in Meditab Specialty in FY11. Goldencross has a
manufacturing unit in Sikkim, India, which enjoys certain tax
benefits. Meditab Specialty has multiple manufacturing units.
Valuation and Price Target
The stock trades at 19.1x and 16.2x our revised F12 and F13E
EPS estimates, respectively, broadly at par with Indian
large-cap pharma multiples.
We arrive at our new price target of Rs320 (down from
Rs336) by applying 18.5x P/E multiple to our F13E EPS of
Rs17.31. The change in our PT is due to a combination of
factors:
• New F13E EPS of Rs17.31 (7.2% earnings cut) and
• Target multiple of 18.5x (18x earlier), at par to a 5%
discount to industry valuation.
We argue for a marginal discount to the industry multiple
because of the combination of factors:
• Strong fundamentals – significant manufacturing
capabilities, large number of drug registrations and quality
balance sheet, versus
• Leadership/succession issues, constraints of the business
model (notably, marketing capabilities in export markets)
and overhang of disputed Rs12.3bn liability for price
overcharge in India.
Downside risks: These include the ongoing price overcharge
litigation with the government, which may take some time to be
resolved, but the company could be asked to deposit part of the
liability (up to Rs3.5bn) in the near term. In addition, rising INR,
succession issues, and Cipla’s dependence on its partners for
overseas marketing are other key downside risks.
Upside risks: Faster and stronger recovery in the exports
business, greater upside from HFA inhaler business in the EU
market in the near term, large MNC deal, quicker progression
of NDDS candidates in the regulatory pipeline and weak INR
are the key upside risks to our price target.
Bull and Bear case scenarios
Bull case – Depending on IP portfolio – Rs384 (down 4%):
Key drivers for this scenario include
• Strong base business (Rs32 per share),
• Monetization of NDDS portfolio (Rs31 per share).
Bear case - Delay in product approvals/ launches – Rs224
(down 5%): Key drivers for this scenario include
• Setback in core business driven by delay in ramp up
Indore facility, inability/ delay to monetize on niche
opportunities and currency headwinds (Rs64 per share),
• NPPA overcharge liability (Rs32 per share)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cipla Ltd.
AGM Highlights: Lite F12,
Mid-Term Drivers Gestating
What's Changed
Price Target Rs336.00 to Rs320.00
FY12e/ FY13e EPS Down 7.8%/ down 7.2%
We view F12 as a year in transition, with a modest
ramp-up in the new Indore facility and limited niche
product opportunities. In view of this, constraints of
the business model (limited leverage to US
opportunities), and full valuations, we retain our EW
rating.
We attended Cipla’s 75
th
AGM – once-a-year chance
to meet management. Overall, Cipla was optimistic
about the industry’s longer-term prospects. It expects
the current $20bn sales (50:50 domestic and exports) to
hit $50bn by 2020 (still at a 50:50 ratio). In the process, it
expects Cipla, too, to grow from current sales of Rs 64bn
to Rs150-200bn by 2020 (implying 9-12% 10-year sales
CAGR). It expects F12 to be the year of stabilization and
consolidation (10% sales growth guidance).
Strategic issues:
1) The niece of Dr. Hamied (CMD), Samina Vaziralli,
has been included in the management team. She
and Kamil (CMD’s nephew, six years in Cipla) will
play a greater role in the company, which should
somewhat address longer-term leadership concerns.
2) Cipla sees US/EU generic opportunities moderating
in the medium to longer term. EM (BRIC, Indonesia,
South Africa, Turkey) provides long-term growth
potential, to be tapped via strategic alliances.
3) Indore facility hasn’t yet received USFDA approval.
4) EU inhalers: Salmeterol HFA (recent approval for
Cipla) has Euro10mn addressable market. Seroflo
launch in EU should happen in two years’ time.
5) Cipla’s US pipeline will provide near-term and
longer-term opportunities.
6) Cipla is focusing on NDDS – devices, nanoparticles,
liposomals; etc. (three ARV NDAs filed in US).
Investment Case: Equal-weight
Earnings Estimates Lowered
We summarize the changes to our Cipla model in Exhibit 1.
F12e EPS cut 7.8%: We have marginally cut our overall sales
assumption by 0.6% (largely exports) and lowered projected
operating margin by 80 bps due to change in revenue mix and
inflationary cost pressures. In addition, we have increased the
effective tax rate to 18% (from 17% earlier).
F13e EPS cut by 7.2%: This largely reflects lower sales and
operating margins base set in F12. We have lowered the top
line by 1.2% and cut operating margins by 100bps. In addition,
we have reduced our interest income assumption and raised
depreciation costs, in view of higher capex plans.
AGM Highlights
Long-term industry outlook: Overall the company was
optimistic about the longer-term prospects of the industry and
expects the current $20bn sales (50:50 domestic and exports)
to grow to $50bn by 2020 (maintaining the 50:50 ratio).
Company outlook: Overall, management expects FY12 to be
a year of consolidation. Specifically, it expects margins to be
maintained at the current levels.
US market: According to management, the company will
benefit from various opportunities (undisclosed), in the near
term as well as in the long term in the US market.
EU inhaler opportunity: Management expects approval of
Seroflo in 2013. The company has not yet finalized its partner.
So far, it has filed for 11 inhaler products in the EU, of which
four are approved. According to the management, in general it
takes about 5-6 years for approval of inhaler products in US/
EU. Salmeterol HFA (recent approval for Cipla) has Euro10mn
addressable market.
Seroflo launch in Russia and South Africa: Cipla has
recorded revenues of about US$2 mln from Seroflo in Russia in
F1Q12. Management expects good sales momentum for
Seroflo in the South African market.
Domestic business: Management expects domestic
business performance to be in line with the market’s growth.
The company is increasing its focus in the rural market. It now
has a total field force of about 7000 medical representatives.
Cipla has leading positions in various therapies including
respiratory care, urology, gynecology, dermatology and
ophthalmology.
African business: Africa is an important segment for Cipla
and because South Africa is the biggest pharmaceutical
market in Africa, Cipla continues to focus on it. It ranks as the
third-largest pharmaceutical company in South Africa.
Instability in Africa/ Middle East: According to management,
if the current unrest in Africa/ Middle East continues, the
company’s business may slow down there.
Strategic alliance for Emerging Markets: According to
management, since it is difficult for a single pharmaceutical
company to expand in various emerging markets
simultaneously, partnerships and strategic alliances would be
a preferable route, including in-licensing of products to fill
therapy gaps and out-licensing to leverage manufacturing
capability.
Biosimilars: Cipla, along with its partners, is working on four
biosimilar products. It plans to launch products from the Indian
facility in 2013.
Capex: The company is now shifting its capex focus on API
manufacturing and R&D activity. Key projects in the near term
include new API unit at Patalganga, new API unit for
anti-cancer at Bengaluru, upgrading at Kurkumbh, Baddi,
Sikkim, Patalganga and Goa and new R&D centre at
Patalganga. Its target is to spend over Rs6bn over the next 1-2
years.
Investments in Meditab Specialty and Goldencross
Pharma: Cipla invested Rs1.9bn in Goldencross Pharma and
Rs1.3bn in Meditab Specialty in FY11. Goldencross has a
manufacturing unit in Sikkim, India, which enjoys certain tax
benefits. Meditab Specialty has multiple manufacturing units.
Valuation and Price Target
The stock trades at 19.1x and 16.2x our revised F12 and F13E
EPS estimates, respectively, broadly at par with Indian
large-cap pharma multiples.
We arrive at our new price target of Rs320 (down from
Rs336) by applying 18.5x P/E multiple to our F13E EPS of
Rs17.31. The change in our PT is due to a combination of
factors:
• New F13E EPS of Rs17.31 (7.2% earnings cut) and
• Target multiple of 18.5x (18x earlier), at par to a 5%
discount to industry valuation.
We argue for a marginal discount to the industry multiple
because of the combination of factors:
• Strong fundamentals – significant manufacturing
capabilities, large number of drug registrations and quality
balance sheet, versus
• Leadership/succession issues, constraints of the business
model (notably, marketing capabilities in export markets)
and overhang of disputed Rs12.3bn liability for price
overcharge in India.
Downside risks: These include the ongoing price overcharge
litigation with the government, which may take some time to be
resolved, but the company could be asked to deposit part of the
liability (up to Rs3.5bn) in the near term. In addition, rising INR,
succession issues, and Cipla’s dependence on its partners for
overseas marketing are other key downside risks.
Upside risks: Faster and stronger recovery in the exports
business, greater upside from HFA inhaler business in the EU
market in the near term, large MNC deal, quicker progression
of NDDS candidates in the regulatory pipeline and weak INR
are the key upside risks to our price target.
Bull and Bear case scenarios
Bull case – Depending on IP portfolio – Rs384 (down 4%):
Key drivers for this scenario include
• Strong base business (Rs32 per share),
• Monetization of NDDS portfolio (Rs31 per share).
Bear case - Delay in product approvals/ launches – Rs224
(down 5%): Key drivers for this scenario include
• Setback in core business driven by delay in ramp up
Indore facility, inability/ delay to monetize on niche
opportunities and currency headwinds (Rs64 per share),
• NPPA overcharge liability (Rs32 per share)
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