Cipla Stock Plunges After USFDA Warning; Elara Capital Optimistic On US Prospects

Cipla Ltd, the prominent Mumbai-based pharmaceutical company, witnessed a sharp decline in its shares on Thursday, emerging as the top losers on the Nifty 50 index. The plunge followed the disclosure by the United States Food & Drug Administration (USFDA) of a warning letter issued to Cipla's Pithampur unit on November 20.

CNBC-TV18 obtained access to the warning letter, revealing concerns raised by the USFDA regarding data integrity issues, product complaints, and microbial contamination at the Pithampur facility. Notably, the letter also referenced similar and recurring observations at Cipla's Goa site, which is already under a warning letter from the USFDA.

The USFDA has mandated that Cipla seek assistance from third-party consultants to rectify these issues. The inspection of Cipla's Pithampur facility took place between February 6 and February 17, 2023, resulting in the issuance of a form 483 with eight observations. This facility is responsible for manufacturing respiratory and oral products for the company.

In August, the Pithampur facility was classified as "Official Action Indicated" (OAI) by the USFDA. This classification typically signifies that objectionable conditions were identified during inspections, leading to regulatory or administrative actions indicated by the USFDA. Consequently, approvals from the site will be temporarily halted. The market had already factored in the delay in approvals for Cipla's inhaler, gAdvair, reflecting in the consensus estimates and impacting the stock price.

Elara Capital, in its latest report, asserts that Cipla's near-term business outlook in the United States remains robust despite the recent FDA warning letter. Despite significant delays in two key products, the report emphasizes the strength of Cipla's US business, citing the substantial gRevlimid opportunity and the overall upswing in the US generics market.

The report predicts a noteworthy 22% sales growth in the business in USD terms for FY24 and anticipates a continued positive trajectory with a 13% growth projection for FY25, inclusive of gAdvair and gAbraxane. Elara Capital minimizes concerns related to the warning letter, stating that it is not of significant concern at this stage.

Elara Capital reiterates an 'Accumulate' rating for Cipla and raises the target price (TP) to Rs 1,349 from Rs 1,244 per share based on 24x (up from 22x) FY26 Price/Earnings (P/E) ratio plus cash per share. The report underscores the company's positive core earnings for FY24-26 and notes that Cipla is currently trading at 25.7x FY25 core EPS.

Anticipation of the warning letter had been brewing in the market since the issuance of form 483. Cipla's shares concluded the trading session on November 23 with a substantial 8% decrease, closing at Rs 1,173 per share.

Investors and industry stakeholders are closely monitoring Cipla's response to the USFDA's concerns and the subsequent actions taken by the company to address the issues raised in the warning letter. The pharmaceutical giant now faces the challenge of restoring confidence in its manufacturing practices and ensuring compliance with regulatory standards to navigate the impact on its market standing.