India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Cadila Healthcare
Consistent growth momentum
„Robust 3Q results; PO raised to Rs880, 15% pot’l upside
Cadila’s 3Q PAT of Rs1.62bn (up 25% YoY) was slightly below BofA-MLe on
higher tax rate while operational performance was in line. Revenues rose 18%
YoY, to Rs11.7bn (largely in line), driven by 17% growth in domestic biz &
sustained strength in US generics (up 33% YoY). We tweak our forecasts (by
~2%) to factor delay in US shipment for Hospira JV (raising FY12E EPS slightly).
Raise PO to Rs880 (at 20x FY12E), at slight premium to sector given stronger
earnings growth of 29% (vs 25% average) & high return ratios (33%+ RoE).
Maintains momentum across businesses
Domestic business sustained robust 17% growth in 3Q, aided by recent new
launches (59 YTD) & strong field force (4500+). US generics growing strongly at
33% YoY (42% of exports, 31% CAGR) remains key growth driver with 10+ new
launches & steady market gains continuing. Strong regulatory pipeline to support
growth in Latam/emerging markets while scale up in JV’s would boost profitability.
Earnings growth supported by healthy margin expansion
We expect 29% earnings CAGR over FY10-13E led by 21% revenue CAGR and
200bps cumulative margin expansion on higher exports mix. Over next 2 years,
we expect Cadila’s investment in biologics (vaccines), niche US launches (NDDS,
aerosols, transdermal patches) & supplies to Abbott for RoW markets can provide
further upside to our estimates. Our forecasts are ~10% above consensus.
Premium valuation justified on stronger earnings growth
Cadila trades at 17.3x FY11E & 14.2x FY12E EPS, a 10% discount to sector
average. Stronger earnings growth and superior return ratios would aid re-rating
for the stock. Our PO is based on 20x FY12E, at discount to current FY11E P/E
multiple & closer to large cap peers with similar business (19.3x).
Key Revenue drivers (3QFY11)
Domestic Sales (49% of revenues)
Formulations – Domestic formulations sales at Rs4.7bn (37% of revenues),
implying 17% growth yoy outpaced industry growth of ~15% driven by 9 new
product launches, including 1 first time launch (“Ostigard 100”, osteoarthritis).
Total launches in 9MFY11 thus reaches to 59, including 19 first time launches
(compared to 60 in FY10). Cardiovascular, Respiratory segments registered
30%+ growth, much above the respective therapy segment growth rates. Strong
fieldforce of ~4500+ would continue to deliver strong growth over medium term on
greater reach to tier 2/3 centers as well. We retain our 18% growth expectations
for Cadila’s domestic formulations business.
Consumers and others - Consumer businesses grew strongly at 18% to
reach Rs1.2bn sales, driven by strong branded portfolio (Wellness business grew
21%). Zydus Wellness remains category leader in all its three brands of Sugar
Free (85% market share), EverYuth and Nutralite (No. 1 name). The company
also introduced ActiLife, a nutritional beverage marking foray into lucrative
nutraceutical segment. Impact of recent brand extensions as well as robust
category growth of 20%+ would sustain Cadila’s dominance in key product lines.
This segment accounted for 11% of total revenues.
Export sales (51% of revenues)
Formulations – Growth in export formulations was driven by US business,
while Latam, Japan businesses also showed robust growth. JV’s (Hospira and
Nycomed) continue to scale up on increased new launches. Formulations export
accounted for 43% of total revenues.
US – US generics (21% of revenues) continued to surprise positively, registering
33% growth YoY (41% over 9m period) with sales of Rs2.3bn. This was driven by
4 new launches (including 2 day 1 launches) as well as sustained market share
gains for existing products during including generic tamsulosin (brand Flomax)
which has limited competition (7-8 players) with Cadila gaining 31% of the
market. Further 3 ANDAs were filed during the quarter (12 YTD) taking total tally
to 118 filings, of which 59 are pending USFDA approval. We expect 8-10
launches in the US market to sustain 31% CAGR over FY10-13E. Niche launches
in FY13 with limited competition including transdermal products, controlled
release etc would further help differentiating the portfolio. Cadila leverages its
integrated business model to remain cost competitive in the US market. We see
upside risk to management’s target of US$175mn sales in US.
EU – EU sales appeared to bounce back after a weak 2Q, however, down 15%
YoY at Rs880mn. Increased dossier filings and site transfers would enhance
visibility for the future and we company expect normalized growth for the rest of
the year.
Latam – Strong performance in Latam market continues with 33% Yoy (24% YTD
growth). Expect more product approvals in 4Q to drive momentum ahead. We
remain confident on strong visibility for 20-25% growth over medium term.
Emerging markets – Flattish sales growth affected by some shipment delays.
Expect robust performance backed by steady new product introductions.
Hospira JV – Hospira JV sales showed significant ramp up on pre-launch
supplies for generic Taxotere launch, resulting in doubling of sales YoY to
Rs366mn, up 17% QoQ. However, delays in USFDA approval for Hospira’s
generic Taxotere (docetaxel, US$1.1bn, Sanofi-Aventis) would lead to weaker
revenues in 4QFY11. Further scale-up in existing products and gradual US
introduction would lead to stronger buildup in volumes (1HFY12 likely). Hospira
JV (50% share) reported sales of Rs366mn and profits of Rs209mn (net margins
of 57%). YTD Hospira JV reported sales and profits of Rs818mn and Rs358mn
respectively.
Bulk drugs
Nycomed JV- Impact of genericization of Protonix leading sharp fall in JV
revenues is expected from 4QFY11 onwards. This JV reported profits of Rs65mn
(on a revenue base of Rs146mn). Supplies for 14 other API’s under the JV would
commence in 1HFY12, with 8 products from the JV stable and balance from the
parent.
Others – Supplies of Clopidogrel in EU markets drove strong growth in API
exports last year.
Earnings call takeaways
„ Focus on chronic segments (respiratory, cardiology), new launches and
fieldforce additions to help outpace industry growth in domestic formulations.
Launch of biologic products (5 approved) in domestic market over next 3-4
quarters may further provide upside boost.
„ Initial pre-launch supplies to Hospira for generic Taxotere (US$1.1bn,
docetaxel, limited competition) led to strong Hospira JV performance.
However, likely delay in USFDA approval would delay volume gains from this
opportunity. We expect ANDA approval in 1QFY12E, implying weaker JV
performance in 4QFY11.
„ Production from Sikkim tax-free facility for Zydus Wellness products would
help keep tax rates below MAT rates. Expect effective tax rates of 14-15%
going forward.
„ New expanded API facility for Nycomed JV has been recently commissioned
and awaits regulatory approvals (expected over next 2 months). Expect
revenues for the 14 new API’s to commence from FY12 onwards, of which 8
would be shipped from the JV itself. However, given significant decline in
pricing as well volume share of partner (innovator) would reflect in weak
qoq growth in 4Q for Nycomed JV.
„ Expect 8-10 new product launches in the US market every year to sustain
growth momentum, apart from market share wins in existing portfolio.
„ Expect commercial supplies from Abbott alliance (for RoW markets) to
commence from FY12, not yet factored in our forecasts.
Premium valuation appears justified
Cadila trades at 17.3x FY12E and 14.2x FY13E EPS, which is at ~10% discount
to Indian large cap pharma peers average. We believe Cadila should trade at
least in line with the sector because of (1) strong earnings visibility (29% EPS
CAGR) compared to 25% sector average; (2) stronger return ratios (RoE of
34%+, RoCE of 23%) and (3) potential upsides from niche launches in US,
licensing deals for novel pipeline.
Our PO of Rs880 is based on 20x FY12E EPS of Rs44, implying 15% upside
potential from current levels. Our target P/E multiple of 20x is at a discount to the
stocks current FY11E multiple of 22.6x and at slight premium to the sector
average of 17.7x (FY12E). We remain confident on re-rating potential of Cadila
on sharp earnings growth and likely upgrades by the Street on increasing
confidence. Our estimates are 8-10% above consensus.
We rate Cadila as our top pick in mid-cap pharma space and reiterate our Buy
rating on the stock.
Key risks: (1) Regulatory delays may affect launch targets for key products; (2)
Currency fluctuations may affect operational performance as 47% of business is
derived from exports and (3) Greater-than-expected international generics pricing
pressure.
Price objective basis & risk
CADILA HEALTHCAR (CDLHF)
Our PO of Rs880 is based on 20x FY12E EPS of Rs44. Our target multiple is at a
slight premium to Indian pharma peers trading at 18x FY12E. Our PO is pegged
at the upper end of its historical 1-year forward P/E band, as we believe re-rating
is justified on a higher growth outlook (29% expected earnings growth). Higher
upside from Hospira JV and sustained US generics growth may provide upside
triggers.
Downside risks: (a) International generics pricing pressure (b) regulatory delays
and (c) foreign exchange fluctuation.
No comments:
Post a Comment