Shares of pharmaceutical giant Cipla Ltd are up 2.13%, reaching ₹1,198.9 on the BSE, following the release of robust second-quarter financial results. These results showcase several remarkable achievements, including a remarkable operational performance, with EBITDA margins peaking at 26% over multiple quarters, and an impressive showing in the US market, combined with consistent growth in the Indian business sector.

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The boost in quarterly margins can be attributed to various factors, including reduced sales of low-margin anti-infective products in the Indian market and effective cost-control measures. Notably, Cipla has surpassed Nomura's margin estimates for the quarter, prompting an upward revision of their EBITDA margin guidance from 23% to a new range of 23-24%.

These improved margins are anticipated to remain sustainable, driven by factors like seasonal trends in the latter half of the fiscal year and ongoing cost management initiatives.

Growth in the US and Indian market

Cipla's performance in the US market, constituting 28% of its total sales, is particularly noteworthy. The company achieved record-breaking quarterly sales, amounting to $229 million, exceeding the estimated range of $210-215 million. Key drugs, such as the generic inhaler Albuterol, the Lanreotide generic for growth tumours, and the generic version of the cancer drug Revlimid, played a substantial role in this success.

It is estimated that the Revlimid generic alone contributed between $30-50 million in sales for the quarter. Cipla now foresees sustainable US sales in the range of $220-225 million, with continued support from increased volumes in existing drugs, drug shortages in specific segments, and a reduction in price erosion.

In the Indian market, which constitutes 42% of Cipla's sales, the company experienced a robust 10% year-on-year growth in the second quarter. This growth was fueled by price hikes and a 100 basis points increase in the market share of chronic drugs, which now stands at approximately 60%. Cipla's future growth prospects include the introduction of the popular weight loss drug semaglutide, plans to launch an oral version of the drug and the exploration of options for an injectable variant.

What do brokerage firms have to say?

Sustaining margins and the performance of non-competition drugs, such as Revlimid generic, will be of significance. Motilal Oswal, which has a Buy rating on the stock with a Target Price of 1450, notes that margins excluding Revlimid generic were at 22.9% for the quarter. Meanwhile, Nomura has a buy call on Cipla shares.

Key factors for the future growth

Another key factor to watch is the launch of essential drugs like the Advair generic inhaler and the Abraxane generic cancer drug. These drugs, vital for Cipla's growth in the US market, have faced delays of approximately six months due to outstanding regulatory issues at their respective production facilities in Indore and Goa.

To address these challenges, Cipla is currently transferring both products to other sites to capitalize on the opportunity. This process has been ongoing for the past 4-5 months. The company is relocating Advair generic to a different site, necessitating a resubmission to the drug regulator. Analysts anticipate that FDA approval may take 12 to 18 months, leading to expectations of a launch in the second half of FY26, potentially facing increased competition by then.

Further, the pharma company has also initiated a site transfer of Abraxane from the Goa facility to a third-party contract manufacturer. Analysts believe that the opportunity is likely to remain intact, as no new generic companies are expected to enter the same market.

In addition to operational developments, the possibility of a transaction involving Cipla's promoters is an important aspect to watch. Umang Vohra, in a conversation with CNBC TV18 following the Q2 results, stated that the company has not received any definitive information regarding such a transaction. He emphasized the separation between the promoters and the company itself, promising transparency if any developments occur. With the strong Q2 performance, Cipla as a potential M&A target may become more enticing.