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Domestic formulations turnaround: A boon
Cadila Healthcare’s (CDH) renewed focus on the chronic segment and expansion
in field force over the past two years (22%) has improved its revenue traction in
the domestic market. Revenues have grown a robust 17% Y-o-Y (9mFY11), in
line with the industry, viz-a-viz relative underperformance over FY07-10 (11.6%
CAGR). CDH is through with restructuring phase and is set to grow in tandem
with industry. This growth will be more inclusive with strong traction from tier-
II/IV markets, as depicted through our distributor survey. Further, recent tie-up
with Bayer Schering (Bayer) secures its future product pipeline.
US generics gearing for more profitable growth
CDH has build USD 200 mn solid franchise (80% CAGR in FY06-11) in US on the
back of higher focus on quality and services. Its recent filings focus on niche or
limited competition products (including Para IVs), encompass USD 160-180 bn
innovator market, which supports next leg of growth. CDH has three Para IVs
opportunities in its pipeline, which offer decent upsides over next two-three years,
in our view. These products also offer higher margin than current plain-vanilla
generic portfolio. We expect CDH’s US sales to post 22% CAGR over FY11-13E.
Higher return on investment through JVs/partnerships
CDH has been exceptionally successful in establishing highly profitable JVs with
global pharma majors. With modest investment of USD 13 mn, it has attained
cumulative profits of USD 100 mn and USD 13 mn from Nycomed and Hospira
JVs (18 mths), respectively. We expect sales from the Hospira JV to ramp-up to
INR 3.5-4.0 bn at peak capacity utilisation by FY13E, with PAT contribution of
INR 875 mn to INR 1 bn (CDH’s share). The incremental earnings from Hospira
JV will offset lower earnings from Nycomed, with genericisation of Pantoprazole.
Outlook and valuations: Strong execution; initiating coverage with ‘BUY’
CDH’s one-year forward P/E has expanded from 9x to 17x, driven by consistent
outperformance and strong execution across markets. However, it still trades at
10% discount to larger peers. We note that CDH’s medium-term earnings growth
(29% CAGR over FY10-13E) is best among peers and its long-term vision to
attain USD 3 bn supports downside risks to valuation. We, thus, value the stock
at 19x FY13E EPS (TP INR 960) and expect gap to narrow down with larger
peers. We initiate coverage on CDH with ‘BUY/Sector Outperformer’.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Domestic formulations turnaround: A boon
Cadila Healthcare’s (CDH) renewed focus on the chronic segment and expansion
in field force over the past two years (22%) has improved its revenue traction in
the domestic market. Revenues have grown a robust 17% Y-o-Y (9mFY11), in
line with the industry, viz-a-viz relative underperformance over FY07-10 (11.6%
CAGR). CDH is through with restructuring phase and is set to grow in tandem
with industry. This growth will be more inclusive with strong traction from tier-
II/IV markets, as depicted through our distributor survey. Further, recent tie-up
with Bayer Schering (Bayer) secures its future product pipeline.
US generics gearing for more profitable growth
CDH has build USD 200 mn solid franchise (80% CAGR in FY06-11) in US on the
back of higher focus on quality and services. Its recent filings focus on niche or
limited competition products (including Para IVs), encompass USD 160-180 bn
innovator market, which supports next leg of growth. CDH has three Para IVs
opportunities in its pipeline, which offer decent upsides over next two-three years,
in our view. These products also offer higher margin than current plain-vanilla
generic portfolio. We expect CDH’s US sales to post 22% CAGR over FY11-13E.
Higher return on investment through JVs/partnerships
CDH has been exceptionally successful in establishing highly profitable JVs with
global pharma majors. With modest investment of USD 13 mn, it has attained
cumulative profits of USD 100 mn and USD 13 mn from Nycomed and Hospira
JVs (18 mths), respectively. We expect sales from the Hospira JV to ramp-up to
INR 3.5-4.0 bn at peak capacity utilisation by FY13E, with PAT contribution of
INR 875 mn to INR 1 bn (CDH’s share). The incremental earnings from Hospira
JV will offset lower earnings from Nycomed, with genericisation of Pantoprazole.
Outlook and valuations: Strong execution; initiating coverage with ‘BUY’
CDH’s one-year forward P/E has expanded from 9x to 17x, driven by consistent
outperformance and strong execution across markets. However, it still trades at
10% discount to larger peers. We note that CDH’s medium-term earnings growth
(29% CAGR over FY10-13E) is best among peers and its long-term vision to
attain USD 3 bn supports downside risks to valuation. We, thus, value the stock
at 19x FY13E EPS (TP INR 960) and expect gap to narrow down with larger
peers. We initiate coverage on CDH with ‘BUY/Sector Outperformer’.
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