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Cadila Healthcare
Stellar 4Q ; Reiterate Buy
„4Q beat led by strong topline; PO raised to Rs975
Cadila’s 4Q PAT of Rs1.79bn (up 51% YoY) beat BofAMLe by 15% on stronger
sales of Rs11.8bn (up 43% YoY, 22% ahead). Increased staff incentive
(Rs510mn) led to slippage in EBITDA margins (18.8%, adj margin at 23%). Strong
domestic biz (up 23%) & sustained strength in US generics (up 51%) led to
revenue surprise. We retain our above consensus estimates and raise PO to
Rs975 on rollover to Sep-12E EPS as we expect further upgrades to help re-rate
stock at slight premium to the sector given strong EPS growth and return ratios.
Sustained strength across businesses
Domestic formulations sustained strong march (up 22% YoY), led by focused
chronic segment approach & strong fieldforce (4500+). US generics surprised
strongly, up 51% YoY, led by mkt share gains (42% of exports, 31% CAGR).
Hospira JV saw 5x jump in sales, thanks to Taxotere supplies in US & expect to
sustain 35% growth going forward on new launches. RoW exports grew 61%, led
by new launches even as regulatory pipeline is strengthened further.
Core profitability robust; 4Q margins affected by one-off
Adjusting for one-time staff incentive of Rs510mn, 4Q EBITDA margins expanded
60bps YoY at 23%, (140bps for FY11) reflecting consistent profitability
improvement. Over the 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 upside to our above consensus estimates.
Valuation premium justified; Upgrades likely
We expect Cadila to trade above the sector average, closer to large peers given
higher stability in business (50% domestic), strong RoEs (34%+) and superior
execution. Our PO is based on 20x Sep-12E, in line with current FY12E P/E
multiple & closer to large cap peers with similar business (19.5x).
Key Revenue drivers
Domestic Sales (49% of revenues)
Formulations – Domestic formulations sales at Rs3.9bn (33% of revenues),
implying 22% growth yoy outpaced industry growth of ~15% driven by steady new
launches as well as focused therapy approach. Recent fieldforce addition as well
as new therapy segments also fuelled growth. Total launches in FY11 thus
reaches 60, including 24 first time launches. Cardiovascular, Respiratory
segments registered 30%+ growth, well above their respective therapy segment
growth rates. Strong fieldforce of ~4500+ should continue to deliver strong growth
over the medium term on greater reach to tier 2/3 centers as well. We retain our
18% growth expectations for Cadila’s domestic formulations business.
Recent 50:50 JV with Bayer for niche therapy segments like female health,
metabolic disorders, Cardiovascular, Oncology, Ant diabetes products will help
sharpen focus on chronic segments as well as launch novel products from
Bayer’s pipeline. We believe that equal participation in this JV from both partners
should help Cadila sustain above industry growth rates over next 3-5 years.
Consumers and others - Consumer businesses grew strongly at 22% to
reach Rs1.1mn sales in 4Q (Rs4.8bn in FY11, up 22%), driven by strong branded
portfolio (Wellness business grew 22%). Zydus Wellness remains category leader
in all three of its brands: Sugar Free (85% market share), EverYuth and Nutralite
(no. 1 player). The company also introduced ActiLife, a nutritional beverage
marking foray into the 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
51% growth YoY (44% in FY11) with sales of Rs2.4bn (Rs9.7bn in FY11). This
was driven by 11 new launches during the year (including 4 day 1 launches) as
well as sustained market share gains for existing products including generic
tamsulosin (brand Flomax) which has limited competition (7-8 players) with Cadila
sustaining 32% of the market.
Cadila filed 24 ANDAs during the year (12 in 4Q) taking the total tally to 130
filings, of which 65 are pending USFDA approval. We expect 10-12 launches in
the US market to sustain 31% CAGR over FY11-13E. New filings include 4
injectibles and 2 nasal products, reflecting focus on niche and NDDS based
products in the US to sustain high growth. Niche launches in FY13 with limited
competition including transdermal products, controlled release etc would further
help to differentiate the portfolio. Cadila leverages its integrated business model
to remain cost competitive in the US market.
EU – EU sales appeared to bounce back with 22% growth after a weak 1H,
however up 1% YoY at Rs654mn. Constant currency growth for the year at 11%
was still above the industry average. Cadila filed 26 dossiers for EU (including 7
for Spain) with 33 approvals so far (67 total filings).Regulatory pipeline and site
transfers would enhance visibility for the future and we expect normalized growth
for next 2-3 years.
LatAm – Strong performance in LatAm market continues with 22% YoY (24% for
FY11) growth. Expect more product approvals in FY12E to drive momentum
ahead. We remain confident on strong visibility for 20-25% growth over medium
term.
Hospira JV – Hospira JV sales showed significant ramp up on supplies for
generic Taxotere US launch, resulting in 5x sales growth YoY to Rs1.3bn, up
264% QoQ. We expect this opportunity to sustain strong growth in this JV for next
3-4 quarters at least, given limited competition. Further scale-up in existing
products and gradual US introduction of other products (including generic
Gemzar in FY12E) would lead to stronger buildup in volumes (1HFY12 likely).
Hospira JV (50% share) reported sales of Rs2.15bn and profits of Rs1.27bn (net
margins of 59%).
Bulk drugs
Nycomed JV- Impact of genericization of Protonix led to sharp fall in JV revenues
in 4QFY11 (down 27% in FY11). This JV reported profits of Rs11mn (on a
revenue base of Rs93mn). Supplies for 14 other APIs under the JV would
commence in 4QFY11, with ramp up expected from 1HFY12 onwards.
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.
„ Taxotere supplies should continue to boost JV revenues with further US
launches improving the revenue outlook.
„ Production from Sikkim tax-free facility for Zydus Wellness products will 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 received regulatory approvals in 4Q. Expect revenues for the 14 new
APIs to ramp up from FY12 onwards, of which 8 would be shipped from the
JV itself.
„ Expect 10-12 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 FY13, not yet factored in our forecasts.
„ Capex plan of Rs5bn for FY12E largely to augment formulation capacity
(~Rs2.5bn), Rs1bn for API enhancement and balance in corporate assets.
„ Forex cover of US$93mn for FY12 (Sep’11 to Mar’12) at US$1=Rs47.72.
„ Strong surge in US generic demand driven by capacity constraints at some
of competitors. Expect current market share gains to be extended over the
medium term. Cadila ranks 12th in theUS generic market in terms of
prescriptions (Rx) volume.
Premium valuation justified
Cadila trades at 19.9x FY12E and 16.2x FY13E EPS, which is at ~10% discount
to Indian large cap pharma peers average. We believe Cadila should trade
atleast in line with the sector because of (1) strong earnings visibility (24.4% EPS
CAGR) compared to 23% sector average; (2) stronger return ratios (RoE of
34%+, RoCE of 23%) and (3) potential upside from niche launches in the US,
licensing deals for novel pipeline.
Our PO of Rs975 is based on 20x Sep-12E EPS of Rs48.7, implying 12% upside
from current levels. Our target P/E multiple of 20x is in line with the stocks current
FY12E multiple and at slight premium to the sector average. 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 the 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 49% 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 Rs975 is based on 20x Sep-12E EPS of Rs48.7. 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 (24% 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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cadila Healthcare
Stellar 4Q ; Reiterate Buy
„4Q beat led by strong topline; PO raised to Rs975
Cadila’s 4Q PAT of Rs1.79bn (up 51% YoY) beat BofAMLe by 15% on stronger
sales of Rs11.8bn (up 43% YoY, 22% ahead). Increased staff incentive
(Rs510mn) led to slippage in EBITDA margins (18.8%, adj margin at 23%). Strong
domestic biz (up 23%) & sustained strength in US generics (up 51%) led to
revenue surprise. We retain our above consensus estimates and raise PO to
Rs975 on rollover to Sep-12E EPS as we expect further upgrades to help re-rate
stock at slight premium to the sector given strong EPS growth and return ratios.
Sustained strength across businesses
Domestic formulations sustained strong march (up 22% YoY), led by focused
chronic segment approach & strong fieldforce (4500+). US generics surprised
strongly, up 51% YoY, led by mkt share gains (42% of exports, 31% CAGR).
Hospira JV saw 5x jump in sales, thanks to Taxotere supplies in US & expect to
sustain 35% growth going forward on new launches. RoW exports grew 61%, led
by new launches even as regulatory pipeline is strengthened further.
Core profitability robust; 4Q margins affected by one-off
Adjusting for one-time staff incentive of Rs510mn, 4Q EBITDA margins expanded
60bps YoY at 23%, (140bps for FY11) reflecting consistent profitability
improvement. Over the 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 upside to our above consensus estimates.
Valuation premium justified; Upgrades likely
We expect Cadila to trade above the sector average, closer to large peers given
higher stability in business (50% domestic), strong RoEs (34%+) and superior
execution. Our PO is based on 20x Sep-12E, in line with current FY12E P/E
multiple & closer to large cap peers with similar business (19.5x).
Key Revenue drivers
Domestic Sales (49% of revenues)
Formulations – Domestic formulations sales at Rs3.9bn (33% of revenues),
implying 22% growth yoy outpaced industry growth of ~15% driven by steady new
launches as well as focused therapy approach. Recent fieldforce addition as well
as new therapy segments also fuelled growth. Total launches in FY11 thus
reaches 60, including 24 first time launches. Cardiovascular, Respiratory
segments registered 30%+ growth, well above their respective therapy segment
growth rates. Strong fieldforce of ~4500+ should continue to deliver strong growth
over the medium term on greater reach to tier 2/3 centers as well. We retain our
18% growth expectations for Cadila’s domestic formulations business.
Recent 50:50 JV with Bayer for niche therapy segments like female health,
metabolic disorders, Cardiovascular, Oncology, Ant diabetes products will help
sharpen focus on chronic segments as well as launch novel products from
Bayer’s pipeline. We believe that equal participation in this JV from both partners
should help Cadila sustain above industry growth rates over next 3-5 years.
Consumers and others - Consumer businesses grew strongly at 22% to
reach Rs1.1mn sales in 4Q (Rs4.8bn in FY11, up 22%), driven by strong branded
portfolio (Wellness business grew 22%). Zydus Wellness remains category leader
in all three of its brands: Sugar Free (85% market share), EverYuth and Nutralite
(no. 1 player). The company also introduced ActiLife, a nutritional beverage
marking foray into the 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
51% growth YoY (44% in FY11) with sales of Rs2.4bn (Rs9.7bn in FY11). This
was driven by 11 new launches during the year (including 4 day 1 launches) as
well as sustained market share gains for existing products including generic
tamsulosin (brand Flomax) which has limited competition (7-8 players) with Cadila
sustaining 32% of the market.
Cadila filed 24 ANDAs during the year (12 in 4Q) taking the total tally to 130
filings, of which 65 are pending USFDA approval. We expect 10-12 launches in
the US market to sustain 31% CAGR over FY11-13E. New filings include 4
injectibles and 2 nasal products, reflecting focus on niche and NDDS based
products in the US to sustain high growth. Niche launches in FY13 with limited
competition including transdermal products, controlled release etc would further
help to differentiate the portfolio. Cadila leverages its integrated business model
to remain cost competitive in the US market.
EU – EU sales appeared to bounce back with 22% growth after a weak 1H,
however up 1% YoY at Rs654mn. Constant currency growth for the year at 11%
was still above the industry average. Cadila filed 26 dossiers for EU (including 7
for Spain) with 33 approvals so far (67 total filings).Regulatory pipeline and site
transfers would enhance visibility for the future and we expect normalized growth
for next 2-3 years.
LatAm – Strong performance in LatAm market continues with 22% YoY (24% for
FY11) growth. Expect more product approvals in FY12E to drive momentum
ahead. We remain confident on strong visibility for 20-25% growth over medium
term.
Hospira JV – Hospira JV sales showed significant ramp up on supplies for
generic Taxotere US launch, resulting in 5x sales growth YoY to Rs1.3bn, up
264% QoQ. We expect this opportunity to sustain strong growth in this JV for next
3-4 quarters at least, given limited competition. Further scale-up in existing
products and gradual US introduction of other products (including generic
Gemzar in FY12E) would lead to stronger buildup in volumes (1HFY12 likely).
Hospira JV (50% share) reported sales of Rs2.15bn and profits of Rs1.27bn (net
margins of 59%).
Bulk drugs
Nycomed JV- Impact of genericization of Protonix led to sharp fall in JV revenues
in 4QFY11 (down 27% in FY11). This JV reported profits of Rs11mn (on a
revenue base of Rs93mn). Supplies for 14 other APIs under the JV would
commence in 4QFY11, with ramp up expected from 1HFY12 onwards.
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.
„ Taxotere supplies should continue to boost JV revenues with further US
launches improving the revenue outlook.
„ Production from Sikkim tax-free facility for Zydus Wellness products will 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 received regulatory approvals in 4Q. Expect revenues for the 14 new
APIs to ramp up from FY12 onwards, of which 8 would be shipped from the
JV itself.
„ Expect 10-12 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 FY13, not yet factored in our forecasts.
„ Capex plan of Rs5bn for FY12E largely to augment formulation capacity
(~Rs2.5bn), Rs1bn for API enhancement and balance in corporate assets.
„ Forex cover of US$93mn for FY12 (Sep’11 to Mar’12) at US$1=Rs47.72.
„ Strong surge in US generic demand driven by capacity constraints at some
of competitors. Expect current market share gains to be extended over the
medium term. Cadila ranks 12th in theUS generic market in terms of
prescriptions (Rx) volume.
Premium valuation justified
Cadila trades at 19.9x FY12E and 16.2x FY13E EPS, which is at ~10% discount
to Indian large cap pharma peers average. We believe Cadila should trade
atleast in line with the sector because of (1) strong earnings visibility (24.4% EPS
CAGR) compared to 23% sector average; (2) stronger return ratios (RoE of
34%+, RoCE of 23%) and (3) potential upside from niche launches in the US,
licensing deals for novel pipeline.
Our PO of Rs975 is based on 20x Sep-12E EPS of Rs48.7, implying 12% upside
from current levels. Our target P/E multiple of 20x is in line with the stocks current
FY12E multiple and at slight premium to the sector average. 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 the 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 49% 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 Rs975 is based on 20x Sep-12E EPS of Rs48.7. 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 (24% 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.
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