Analyst Corner: Fair value of Rs 30 on Cipla for concerns on IV Tramadol

The USFDA’s Complete Response Letter (CRL) to Avenue Therapeutics’ (Avenue) NDA for IV Tramadol, while likely to raise concerns over the drug’s future as approval pathway remains unclear, poses limited risk to Cipla as future payment is based on several conditions being met, failing which Cipla can renegotiate deal terms. In case of delay in approval or unfavourable outcome (label, REMS), Cipla could terminate the deal and write off $35m; or renegotiate deal terms and pay less than the committed $180m. We have built in INR30 fair value for IV Tramadol (~4% of fair value) assuming FY22 launch.

The CRL stated that IV tramadol is not safe to treat the intended population i.e., those in acute pain requiring opioids. According to the FDA, if the patient requires an analgesic after the first dose of IV tramadol, then it is most likely to be an opioid. This is likely to cause opioid-related side effects, thus, negating the intended aim of IV tramadol. However, the FDA did not identify a safety signal in Avenue’s clinical development programme. In addition, the CRL stated that the FDA requires an adequate terminal sterilisation validation prior to NDA approval, which is planned for later this quarter.

Avenue is attempting a Type A meeting (urgent meeting for a stalled drug development) within the next 30 days to reach some kind of understanding with the FDA. The company believes the drug can be approved by April 30, 2021, but is not committing to this timeline at this stage. We have built in INR30 fair value for IV tramadol for Cipla, which is ~4% of fair value. This is based on 75% probability of approval, $250mn peak sales in FY30 and an expected launch in FY22.

Cipla had invested $35mn in FY19 for 33% stake and was expected to buy out the balance for $180mn subject to certain conditions FDA approval by April 30, 2021; no REMS programme; general pain label (and not restricted to any surgery); and d) a Schedule-4 drug (low potential for abuse). In the likelihood of conditions not being met, Cipla has the right from May 1-October 31, 2021, to: a) terminate the deal entailing write-off of $35m that stands on its balance sheet as a one-off in the worst case; b) not go ahead with balance stake purchase; and c) renegotiate the second payment tranche (of $180m) .