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We maintain a BUY on Cadila Healthcare (CDH), with a 12-month PT of Rs937.
CDH presents a well-diversified business model with a strong execution record.
The ground is set for stronger growth in India and the US. Product opportunities at
the Hospira JV and in the US may spell upside to margins. The valuation discount
to front-line generic peers should narrow over time, as visibility improves.
Catalysts
Product approvals in the US; product launch and ramp-up in Hospira JV; valueaccretive acquisitions.
Anchor themes
CDH is a play on: 1) the generic opportunity in the US; 2) the rise in medicine
consumption in India; and 3) the potential rise in the generic opportunity in markets
such as France, Spain and Japan.
3Q FY11 in line with estimates
3Q FY11 in line with expectations
CDH recorded sales growth at 18% y-y for the quarter. Sales were 3%
below our estimates. Net profit grew at 25%, only marginally below
our expectations.
Domestic business strong; exports rise sequentially
The domestic business growth rate, at 16.7% y-y, is now robust for
the past three quarters. We expect CDH to sustain its growth rate
above market. In the Export markets the growth rate was lower than
our expectation in South Africa and Europe. The US business
continues to gain traction.
Nycomed on decline; Hospira to pick up
As expected, the Nycomed JV is on the decline and is expected to fall
substantially in 4Q FY11 on Protonix patent expiry. Taxotere approval
remains key for the Hospira JV. FDA approval for Taxotere is
expected in the near term.
Expect growth to hold up at >20%
Over FY06-10, CDH marked a revenue CAGR 24%. We expect a
CAGR of >20% to hold up near term, driven by: 1) growth in domestic
formulation; 2) a pick-up in US sales, and; 3) a ramp-up in US sales
from the Hospira JV. We believe that product opportunities at the
Hospira JV and the US present an upside risk to margins.
Maintain a BUY; price target at Rs937
We maintain a BUY on CDH with a 12-month PT of Rs937. Our PT is
based on 20x FY12-13F blended EPS, in line with the current
valuation multiple. With improvement in visibility, the valuation
discount of 15% to front-line peers can narrow, in our view.
3Q FY11 results review
Results largely in line
Sales growth at 18%
CDH delivered revenue growth of 18% y-y for the quarter. The revenue recorded
was 3% lower than our expectations. Domestic revenues were in line with
expectations but, exports were 6% below our expectations
Strong domestic growth: CDH reported strong growth for the third quarter in row
for its domestic formulations business. The segment grew 16.6% y-y as compared
to 19.1% and 17.2% in 2Q FY11 and 1Q FY11. We believe the above-average
market growth rate is sustainable given expanded field force and new introductions.
The company introduced nine new products in this quarter with 59 launches YTD.
US Exports grow sequentially: CDH launched four products in the US —
Losartan, Losartan HCTZ, Pramipexole and Ramipril during the quarter. Export
sales to US grew 4.8% sequentially. CDH currently has an annual run rate of
US$210mn. The company has filed three ANDAs with the US FDA taking the
overall filings for the year to 12.
Other export geographies grew sequentially: Geographies such as EU, Japan,
Emerging markets and Latin America exhibited flat to high sequential growth.
Growth in the EM were muted primarily due to lower growth in South Africa. Lower
growth in South Africa is on account of supply issues and lower intensity of new
product approvals. In Europe, the y-y decline in attributed to drop in clopidogrel
sales.
Hospira JV: The sales and profit booked in the JV is primarily from sale of
products to Europe. To the US there is only the initial supply of Taxotere. Taxotere
approval is expected anytime and scale-up is expected thereafter. Gemzar and
Eloxatin can be additional opportunities. For 9MFY11, the JV recorded net profit
margin of 44%. This can potentially rise with launch of Taxotere.
Nycomed JV: As expected, the sequential decline in Nycomed JV continues. In 4Q,
the Nycomed JV sales and profit will decline substantially as Protonix patent
expires in January 2011. Generic competition post patent expiry shall result in
substantial decline in value and market share for Nycomed JV. The JV has entered
into agreement for supply of additional 14 APIs but that are likely to commence only
from FY12.
The cost items were largely in line with our expectations. The tax rate was higher
than our expectation and for the full year the company maintains guidance of 15%
tax rate.
Risks that could impede the achievement of our price target include but are not
restricted to the following: lower-than-expected growth in emerging market
revenues; significant delay in approval of new products from the US FDA and other
regulatory issues; material delays in execution in the US market leading to delayed
launches; greater-than-expected price decline in any of the markets due to
competition or regulatory changes; Lower-than-estimated growth in the Hospira JV,
and; significant appreciation in the INR against export currencies.
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