Cipla share price rises more than 3%: overhang of warning letter still remains
Cipla Ltd share price gained more than 3% in intraday trades on Friday after having corrected more than 8% on Thursday on news of the company receiving a warning letter from the US drug regular for its Pithampur, Indore manufacturing facility. The facility remains important as exports of respiratory products such as Albuterol generics to the US are made form this facility. Albuterol generics are contributing well to CIPLA’s US sales growth and risk has risen that any further escalation of issues pertaining to warning letter can lead to supply disruption. Though many analysts currently do not see further escalations, nevertheless the overhang will remain.
The Warning Letter received from US FDA by Cipla Indore facility was in continuation of observations received in Form 483 on 17th February, 2023 and inspection classification of the said facility as Official Action Indicated (“OAI”) received on 5th August, 2023.
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Analysts at a brokerage have argued that FDA has not issued an Import Alert till now and 9 months have passed since form 483 was issued for the Pithampur facility). They said that USFDA had a chance of a thorough evaluation and has chosen to issue warning letter at this stage but not an Import alert. Any suspicion of issues with product quality would have been dealt with with more toughness feel analysts. However, in the future if Cipla doesn’t provide a resolution, an Alert may be issued, which is obvious, they added.
Hence an overhang of regulatory issues will remain on the company’s share price.
Meanwhile the clearance of the plant is also necessary for the launch of much awaited respiratory inhaler “Advair” generics. The product had been filed from the same facility. For now, though US sales growth is being driven by contributions from Albuterol generics and multiple Myeloma drug generics of Revlimid. However another large launch is necessary to build on the growth momentum.
CIpla Ltd has said that “we once again confirm that we do not see material risk to our existing commercial product portfolio. The company is in the process of executing de-risking plan for its new products and simultaneously addressing the observations expeditiously.
Surya Patra, Vice President Institutional Research at PhillipCapital (India) Private Limited in his note to clients said that what discomforts us about Cipla is the Stretched valuation, a Visible risk of earning cut led by albuterol and sign of sequential decline in generic Revlimid sales.
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As per Patra anticipated value unlocking from a deal by promoters (seems called off or deferred) and improved earnings led by generic Revlimid has certainly stretched its valuations to 22 times FY25 (inclusive of Revlimid generic) and 28 times FY25 base business earnings (excluding-Revlimid generic), which is about 25% premium to Dr Reddy and Zydus Life. On the top of that, visible risk of earnings cut for Cipla due to potential volume loss in largest and most profitable US Drug (Albuterol Sulfate) could make the Cipla valuations super rich says Patra.
Patra estimates the concern over Albuterol Sulfate pose an earning risk of 13% to Cipla’s s FY25 earnings.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions
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Updated: 24 Nov 2023, 04:35 PM IST
