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In a consolidation phase
CHANGE
Lack of clarity on US growth prospects for
We initiate coverage on Cadila with a HOLD rating
letter on its sterile facility, a key growth driver for the company
question mark on its US growth prospects in the long run. We
if the warning letter would have any indirect impact on
approvals too, which means FY13 growth in the US is
CATALYST
Earnings growth to slow significantly over FY11
High dependence on old molecules is likely to restrict
growth to be in line with the industry. We estimate e
just 14% over FY11-14., significantly lower than the
FY08-11. This is due to slower than historical growth in the US
support from Brazil, Hospira JV and Abbott tie-up
VALUATION
Warning letter from US FDA to remain an overhang
We value Cadila at 17x one-year forward earnings to
INR798, upside potential of 5%. Key risks to our call are slippages in the
domestic market, failure to resolve US FDA issues at its
inability to turn around Nesher’s operations.
COMMENT
Key highlights of the report
§ Base case, bear case, bull case growth scenarios for the US base
business and impact on EPS for FY13 and FY14.
§ Case study of Lupin’s stock performance during the warning letter
period and post resolution
§ Nesher Pharma US FDA/DoJ timelines, P&L statement and balance
sheet
§ Domestic formulations: top 10 brands analysis
§ Analysis of support drivers to the US and India businesses
§ R&D pipeline and spending
Investment view: In a consolidation phase
Cadila has seen the largest P/E expansion of all Indian pharmas in the past two years …
Cadila Healthcare (Cadila) is India’s sixth-largest pharma company by revenue market share in the
domestic market, it has a well-established presence in the overseas markets, and it has partnerships with
marquee clients such as Hospira (HSP US, Not rated), Nycomed (acquired by Takeda, 4502 JP, Not rated),
Abbott (ABT US, Not rated) and Bayer AG (BAYN GY, Not rated). Starting FY09, Cadila saw a sharp expansion
in its valuations as the market sensed a sharp scale up in its US operations, strong growth prospects in
India and emerging markets, leadership position in the niche domestic consumer space, good potential from
partnerships (particularly the one with Hospira for oncology products) and, most importantly, reduced
dependence on the Nycomed JV for profitability. Cadila demonstrated strong execution skills, making
investors confident of its revenue target of USD1b by FY11 and USD3b by FY16. Moreover, Cadila beat
Street earnings estimates for eight consecutive quarters.
… but some of it has been lost due to US FDA’s warning letter and tough near-term prospects
However, the past few months have seen a reversal of some of the P/E expansion. In July 2011, Cadila
received a pre-inspection warning letter from the US FDA for its sterile facility near Ahmedabad (sterile
products are the identified key growth drivers for the company’s US business starting FY14) and, at the
same time, it disappointed the Street with a 1QFY12 earnings miss (4QFY11 saw extra sales being pushed to
achieve the USD1b mark). The stock has lost over 20% in the past three months, underperforming the BSE
Healthcare index (-9% return) and the BSE Sensex (-9% return).
While the share price has corrected materially over the past three months, we believe the market would
await clarity on the potential US base business growth in FY13 (as a result of an indirect impact of the
warning letter for the sterile facility) before there is any potential for the stock to re-rate again.
US: What happens to FY13 growth if the US FDA issues fail to get resolved
Cadila has been among the strongest performers of India pharmas in the US in the past five years, with the
company having generated revenue CAGR of 81% to INR9.6b. Cadila has filed 130 ANDAs with the US FDA, 65
products have been approved by the US FDA, and it has launched 40 products in the US.
While Cadila’s product launches have been restricted to ‘me-too’ products so far, it has identified
differentiated generics/difficult-to-manufacture products as its next leg of growth in the US. Cadila has
filed five nasal products, two transdermals and 18 parenterals in the US so far. The market size for nasals
is USD20b, for transdermals USD10b and for oncology USD55b, with only few players entering these
segments due to the complexity of the products.
The company received a pre-approval inspection warning letter for its sterile facility from the US FDA in
July 2011 for significant violations of US Good Manufacturing Practices (GMP). The warning letter suggests
that laboratory records were incomplete and that they failed to follow appropriate written procedures.
Cadila says it has responded to these observations and expects a resolution in the next six-to-nine months
(i.e. before end-FY12).
Note that, this was a pre-approval inspection for the facility after which an ANDA is approved by the US
FDA. As this issue is not yet resolved, no pending ANDA application or new filings of Cadila would be
considered for review by the US FDA from the Ahmedabad facility. This puts a big question mark on Cadila’s
aspiration to launch differentiated generics in the US.
While the sterile facility has a warning letter, the non-sterile facility was cleared without any major
observations. Therefore, Cadila’s existing supplies to the US should not be impacted. But, given that the
manufacturing facility for both sterile and non-sterile products is one unit (Moraiya, Ahmedabad) and
also the products are registered under one company (Zydus), we believe the US FDA may become cautious
about approving oral products. Cadila has made no guidance for product launches in the US this year
(launched three products before the warning letter) to be conservative due to the pending US FDA issues.
Cadila guides to FY12 US revenue growth of 20% y-y (excluding the impact of the USD60m Nesher
acquisition in 1QFY12) with only three product launches in the US this year. We believe growing the US
base revenue at 20% would be tough without any further launches in the US, thus we conservatively build
in a 10% growth scenario.
To analyse Cadila’s US growth prospects for FY13, we look at three possibilities and their impact on
earnings.
Base case: Assuming Cadila resolves the warning letter issues by September 2012 and new approvals start
to come through in 2QFY13, we estimate base US revenue growth of 5% for FY13 and 20% for FY14. In this
case, the multiple would remain unchanged at 16x 12-month forward P/E (current valuations).
Bull case: Assuming a resolution in the next six months (as guided by management) and new approvals
start to come through in 1QFY13, we estimate base US revenue growth of 15% each for FY13 and FY14. In
this case, the multiple would improve to 18x 12-month forward P/E (last two-year average).
Bear case: Assuming a resolution takes more time and new approvals are pushed back further, we estimate
base US revenue growth of -5% for FY13 and 5% for FY14. In this case, the multiple would contract to 15x
12-month forward P/E (last five-year average).
The earnings impact in a bull-case scenario is 6%/5% above the base case for FY13/14 and for a bear case
scenario it is -5%/-7% below the base case for FY13/14.
We acknowledge that clearance of facilities with warning letters happens only on a case-by-case basis.
Below we present case studies on Lupin’s Mandideep (discussed later) facility. Like Cadila, Lupin’s US
fortunes were dependent on its only US FDA approved facility at that time, Mandideep.
Lupin received a warning letter from the US FDA for its Mandideep facility in May 2009 for violating GMP
standards. Mandideep was the only facility supplying products to the US and it housed Lupin’s most
important product, Suprax. The company took a record seven months to clear the warning letter. In those
seven months (May 2009-January 2010), Lupin underperformed its peers but once it cleared the warning
letter, share price reaction was sharp and its valuations moved into a new zone.
Nesher acquisition gives presence in restricted controlled substances, but will take time to deliver
Cadila acquired Nesher Pharma (the generic subsidiary of US-based KV Pharma, KV/A US, Not rated) for
USD60m in April 2011. Nesher Pharma has presence in the USD7b controlled substance market. Controlled
substance is a restricted space where there are government-imposed restrictions on import of raw material
and therefore it is mandatory to have a finished formulations facility in the US. This creates an entry
barrier, thus the competition in this segment is limited. Sun Pharma (SUNP IN), Aurobindo Pharma (ARBP
IN, Not rated) and Glenmark Pharma (GNP IN, Not rated) are the Indian companies with presence in the
segment.
KV Pharma faced significant US FDA/DoJ issues starting 2008, which has impacted its operations materially.
Below we present the timelines from the breakout of US FDA issues and their resolution
KV Pharma US FDA resolution timelines
Timelines Event
May 2008 Received two reports of an oversized morphine sulphate extended release tablets
July 2008 Voluntary recall of morphine sulphate 15mg/30mg/60mg tablets in Canada
October 2008 Voluntary recall of dextroamphetamine sulphate 5mg tablets
November 2008 Voluntary recall of five generic products by Ethex Corp (Generic arm of KV Pharma)
December 2008 US FDA begins inspection of facilities
Voluntarily suspended shipments of 14 US FDA approved products
January 2009 Voluntarily suspended shipments of all products except three distributed products
Nationwide recall of products manufactured or packaged at KV facilities
February 2009 The US FDA issued inspectional observations (Form 483 report)
Reduces workforce by 700 employees
March 2009 Entered into a consent decree with the US FDA
Initiated disposal of existing affected inventory of products
Provided a work plan to the US FDA for approval
Sued by Department of Justice on felony charges
July 2009 US FDA accepts work plan with minor changes
August 2009 Final work plan submitted and accepted by the US FDA
January 2010 Independent cGMP expert Lachman Consultants notifies US FDA that KV facilities are in compliance with cGMP
February 2010 Reaches agreement with DoJ, Ethex agrees to pay USD25.8m fine, shut operations
March 2010 Further reduction in workforce planned
Ethex ceases to exist
July 2010 Lachman completes review of validation batches of individual products
August 2010 US FDA conducts own inspection based on Lachman report
September 2010 US FDA approves first discontinued product Potassium Chloride Extended Release Capsule
KV Pharma resumes shipment of extended release potassium chloride capsule-Micro-K 10mEq and Micro-K 8mEq
October 2010 Establishes new generic marketing subsidiary Nesher Pharma Inc
November 2010 Starts looking out for potential buyers for generic business, appoints an investment banker
December 2010 Resumes shipment of generic version of extended release potassium chloride capsule
Ethex operations dissolved
June 2011 Announces divesture of generic business to Zydus for USD60m
Sources: KV Pharma; BNP Paribas
Cadila has taken over certain assets of Nesher (gross assets less inventory is USD35m) and has assumed
certain liabilities related to product return (likely to be very small if it materialises at all). Note that no
liability has been assumed for the regulatory issues. Nesher has one product in the market Potassium
Chloride 20MEQ, has seven existing filings and five products under development, which have a combined
market size of USD2.1b
Key risks
Any slippage in domestic growth rates
Given the prospect of US growth slowing in the near term, Cadila would be more dependent on its domestic
formulations business to sustain overall growth. We conservatively assume revenue CAGR of 13% over
FY11-14 from the domestic market. Any slippages in domestic growth rates will have a negative impact on
our estimates and, hence, valuations.
US FDA warning letter issues get prolonged
It is difficult to predict when Cadila would overcome the US FDA issues at its sterile facility. We take
comfort from the fact that Lupin and Sun Pharma managed to resolve their warning letters within a year.
Cadila’s management has suggested that it will be able to reach a resolution in the next 6-9 months. We
note that Cadila has a strong track record of GMP compliance with all regulators. A prolonged delay in the
resolution of the warning letter would have a significant impact on our earnings estimates and stock call.
Failure to turn around Nesher’s operations
Cadila has indicated that Nesher would record a small loss in FY12 and would turn around in FY13. The
company failure to turn around Nesher may have some impact on our margin assumptions.
Valuations
Earnings CAGR of 13% over FY11-14, compared with 43% over FY08-11
Cadila reported earnings CAGR of 43% over FY08-11, driven by strong growth from the US, India and the
Hospira JV. We expect growth to slow in FY12 and to start recovering from FY13. We expect FY12 to be the
slowest year in Cadila’s history, due to muted US sales, margin stress from a decline in domestic growth,
losses from Nesher and higher GMP costs.
Stock price movement will likely be driven by news flows on US FDA warning letter
Cadila’s US growth depends on product launches, which to some extent may be linked to the clearance of
issues related the sterile unit. Thus, we analyse three scenarios and their impact on earnings.
Base case: Assuming Cadila resolves the warning letter issues by September 2012 and new approvals start
to come through in 2QFY13, we estimate base US revenue growth of 5% for FY13 and 20% for FY14. In this
case, the multiple would remain unchanged at 16x 12-month forward P/E (current valuations).
Bull case: Assuming a resolution in the next six months (as guided by management) and new approvals
start to come through in 1QFY13, we estimate base US revenue growth of 15% each for FY13 and FY14. In
this case, the multiple would improve to 18x 12-month forward P/E (last two-year average).
Bear case: Assuming a resolution takes more time and new approvals are pushed back further, we estimate
base US revenue growth of -5% for FY13 and 5% for FY14. In this case, the multiple would contract to 15x
12-month forward P/E (last five-year average).
The earnings impact in a bull-case scenario is 6%/5% above the base case for FY13/14E and for a bear case
scenario it is -5%/-7% below the base case for FY13/14.
Initiate coverage at HOLD with a target price of INR798
We believe the US FDA warning letter will remain an overhang on Cadila’s valuations in the near term. We
value Cadila at 17x 12-month forward earnings, a 10% discount to its closest peer Lupin (LPC IN, HOLD, CP:
INR472) to reflect the overhang from the warning letter, which gives us a target price of INR798. Our target
price implies just 5% upside potential from current levels, thus we initiate coverage on Cadila with a HOLD
recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In a consolidation phase
CHANGE
Lack of clarity on US growth prospects for
We initiate coverage on Cadila with a HOLD rating
letter on its sterile facility, a key growth driver for the company
question mark on its US growth prospects in the long run. We
if the warning letter would have any indirect impact on
approvals too, which means FY13 growth in the US is
CATALYST
Earnings growth to slow significantly over FY11
High dependence on old molecules is likely to restrict
growth to be in line with the industry. We estimate e
just 14% over FY11-14., significantly lower than the
FY08-11. This is due to slower than historical growth in the US
support from Brazil, Hospira JV and Abbott tie-up
VALUATION
Warning letter from US FDA to remain an overhang
We value Cadila at 17x one-year forward earnings to
INR798, upside potential of 5%. Key risks to our call are slippages in the
domestic market, failure to resolve US FDA issues at its
inability to turn around Nesher’s operations.
COMMENT
Key highlights of the report
§ Base case, bear case, bull case growth scenarios for the US base
business and impact on EPS for FY13 and FY14.
§ Case study of Lupin’s stock performance during the warning letter
period and post resolution
§ Nesher Pharma US FDA/DoJ timelines, P&L statement and balance
sheet
§ Domestic formulations: top 10 brands analysis
§ Analysis of support drivers to the US and India businesses
§ R&D pipeline and spending
Investment view: In a consolidation phase
Cadila has seen the largest P/E expansion of all Indian pharmas in the past two years …
Cadila Healthcare (Cadila) is India’s sixth-largest pharma company by revenue market share in the
domestic market, it has a well-established presence in the overseas markets, and it has partnerships with
marquee clients such as Hospira (HSP US, Not rated), Nycomed (acquired by Takeda, 4502 JP, Not rated),
Abbott (ABT US, Not rated) and Bayer AG (BAYN GY, Not rated). Starting FY09, Cadila saw a sharp expansion
in its valuations as the market sensed a sharp scale up in its US operations, strong growth prospects in
India and emerging markets, leadership position in the niche domestic consumer space, good potential from
partnerships (particularly the one with Hospira for oncology products) and, most importantly, reduced
dependence on the Nycomed JV for profitability. Cadila demonstrated strong execution skills, making
investors confident of its revenue target of USD1b by FY11 and USD3b by FY16. Moreover, Cadila beat
Street earnings estimates for eight consecutive quarters.
… but some of it has been lost due to US FDA’s warning letter and tough near-term prospects
However, the past few months have seen a reversal of some of the P/E expansion. In July 2011, Cadila
received a pre-inspection warning letter from the US FDA for its sterile facility near Ahmedabad (sterile
products are the identified key growth drivers for the company’s US business starting FY14) and, at the
same time, it disappointed the Street with a 1QFY12 earnings miss (4QFY11 saw extra sales being pushed to
achieve the USD1b mark). The stock has lost over 20% in the past three months, underperforming the BSE
Healthcare index (-9% return) and the BSE Sensex (-9% return).
While the share price has corrected materially over the past three months, we believe the market would
await clarity on the potential US base business growth in FY13 (as a result of an indirect impact of the
warning letter for the sterile facility) before there is any potential for the stock to re-rate again.
US: What happens to FY13 growth if the US FDA issues fail to get resolved
Cadila has been among the strongest performers of India pharmas in the US in the past five years, with the
company having generated revenue CAGR of 81% to INR9.6b. Cadila has filed 130 ANDAs with the US FDA, 65
products have been approved by the US FDA, and it has launched 40 products in the US.
While Cadila’s product launches have been restricted to ‘me-too’ products so far, it has identified
differentiated generics/difficult-to-manufacture products as its next leg of growth in the US. Cadila has
filed five nasal products, two transdermals and 18 parenterals in the US so far. The market size for nasals
is USD20b, for transdermals USD10b and for oncology USD55b, with only few players entering these
segments due to the complexity of the products.
The company received a pre-approval inspection warning letter for its sterile facility from the US FDA in
July 2011 for significant violations of US Good Manufacturing Practices (GMP). The warning letter suggests
that laboratory records were incomplete and that they failed to follow appropriate written procedures.
Cadila says it has responded to these observations and expects a resolution in the next six-to-nine months
(i.e. before end-FY12).
Note that, this was a pre-approval inspection for the facility after which an ANDA is approved by the US
FDA. As this issue is not yet resolved, no pending ANDA application or new filings of Cadila would be
considered for review by the US FDA from the Ahmedabad facility. This puts a big question mark on Cadila’s
aspiration to launch differentiated generics in the US.
While the sterile facility has a warning letter, the non-sterile facility was cleared without any major
observations. Therefore, Cadila’s existing supplies to the US should not be impacted. But, given that the
manufacturing facility for both sterile and non-sterile products is one unit (Moraiya, Ahmedabad) and
also the products are registered under one company (Zydus), we believe the US FDA may become cautious
about approving oral products. Cadila has made no guidance for product launches in the US this year
(launched three products before the warning letter) to be conservative due to the pending US FDA issues.
Cadila guides to FY12 US revenue growth of 20% y-y (excluding the impact of the USD60m Nesher
acquisition in 1QFY12) with only three product launches in the US this year. We believe growing the US
base revenue at 20% would be tough without any further launches in the US, thus we conservatively build
in a 10% growth scenario.
To analyse Cadila’s US growth prospects for FY13, we look at three possibilities and their impact on
earnings.
Base case: Assuming Cadila resolves the warning letter issues by September 2012 and new approvals start
to come through in 2QFY13, we estimate base US revenue growth of 5% for FY13 and 20% for FY14. In this
case, the multiple would remain unchanged at 16x 12-month forward P/E (current valuations).
Bull case: Assuming a resolution in the next six months (as guided by management) and new approvals
start to come through in 1QFY13, we estimate base US revenue growth of 15% each for FY13 and FY14. In
this case, the multiple would improve to 18x 12-month forward P/E (last two-year average).
Bear case: Assuming a resolution takes more time and new approvals are pushed back further, we estimate
base US revenue growth of -5% for FY13 and 5% for FY14. In this case, the multiple would contract to 15x
12-month forward P/E (last five-year average).
The earnings impact in a bull-case scenario is 6%/5% above the base case for FY13/14 and for a bear case
scenario it is -5%/-7% below the base case for FY13/14.
We acknowledge that clearance of facilities with warning letters happens only on a case-by-case basis.
Below we present case studies on Lupin’s Mandideep (discussed later) facility. Like Cadila, Lupin’s US
fortunes were dependent on its only US FDA approved facility at that time, Mandideep.
Lupin received a warning letter from the US FDA for its Mandideep facility in May 2009 for violating GMP
standards. Mandideep was the only facility supplying products to the US and it housed Lupin’s most
important product, Suprax. The company took a record seven months to clear the warning letter. In those
seven months (May 2009-January 2010), Lupin underperformed its peers but once it cleared the warning
letter, share price reaction was sharp and its valuations moved into a new zone.
Nesher acquisition gives presence in restricted controlled substances, but will take time to deliver
Cadila acquired Nesher Pharma (the generic subsidiary of US-based KV Pharma, KV/A US, Not rated) for
USD60m in April 2011. Nesher Pharma has presence in the USD7b controlled substance market. Controlled
substance is a restricted space where there are government-imposed restrictions on import of raw material
and therefore it is mandatory to have a finished formulations facility in the US. This creates an entry
barrier, thus the competition in this segment is limited. Sun Pharma (SUNP IN), Aurobindo Pharma (ARBP
IN, Not rated) and Glenmark Pharma (GNP IN, Not rated) are the Indian companies with presence in the
segment.
KV Pharma faced significant US FDA/DoJ issues starting 2008, which has impacted its operations materially.
Below we present the timelines from the breakout of US FDA issues and their resolution
KV Pharma US FDA resolution timelines
Timelines Event
May 2008 Received two reports of an oversized morphine sulphate extended release tablets
July 2008 Voluntary recall of morphine sulphate 15mg/30mg/60mg tablets in Canada
October 2008 Voluntary recall of dextroamphetamine sulphate 5mg tablets
November 2008 Voluntary recall of five generic products by Ethex Corp (Generic arm of KV Pharma)
December 2008 US FDA begins inspection of facilities
Voluntarily suspended shipments of 14 US FDA approved products
January 2009 Voluntarily suspended shipments of all products except three distributed products
Nationwide recall of products manufactured or packaged at KV facilities
February 2009 The US FDA issued inspectional observations (Form 483 report)
Reduces workforce by 700 employees
March 2009 Entered into a consent decree with the US FDA
Initiated disposal of existing affected inventory of products
Provided a work plan to the US FDA for approval
Sued by Department of Justice on felony charges
July 2009 US FDA accepts work plan with minor changes
August 2009 Final work plan submitted and accepted by the US FDA
January 2010 Independent cGMP expert Lachman Consultants notifies US FDA that KV facilities are in compliance with cGMP
February 2010 Reaches agreement with DoJ, Ethex agrees to pay USD25.8m fine, shut operations
March 2010 Further reduction in workforce planned
Ethex ceases to exist
July 2010 Lachman completes review of validation batches of individual products
August 2010 US FDA conducts own inspection based on Lachman report
September 2010 US FDA approves first discontinued product Potassium Chloride Extended Release Capsule
KV Pharma resumes shipment of extended release potassium chloride capsule-Micro-K 10mEq and Micro-K 8mEq
October 2010 Establishes new generic marketing subsidiary Nesher Pharma Inc
November 2010 Starts looking out for potential buyers for generic business, appoints an investment banker
December 2010 Resumes shipment of generic version of extended release potassium chloride capsule
Ethex operations dissolved
June 2011 Announces divesture of generic business to Zydus for USD60m
Sources: KV Pharma; BNP Paribas
Cadila has taken over certain assets of Nesher (gross assets less inventory is USD35m) and has assumed
certain liabilities related to product return (likely to be very small if it materialises at all). Note that no
liability has been assumed for the regulatory issues. Nesher has one product in the market Potassium
Chloride 20MEQ, has seven existing filings and five products under development, which have a combined
market size of USD2.1b
Key risks
Any slippage in domestic growth rates
Given the prospect of US growth slowing in the near term, Cadila would be more dependent on its domestic
formulations business to sustain overall growth. We conservatively assume revenue CAGR of 13% over
FY11-14 from the domestic market. Any slippages in domestic growth rates will have a negative impact on
our estimates and, hence, valuations.
US FDA warning letter issues get prolonged
It is difficult to predict when Cadila would overcome the US FDA issues at its sterile facility. We take
comfort from the fact that Lupin and Sun Pharma managed to resolve their warning letters within a year.
Cadila’s management has suggested that it will be able to reach a resolution in the next 6-9 months. We
note that Cadila has a strong track record of GMP compliance with all regulators. A prolonged delay in the
resolution of the warning letter would have a significant impact on our earnings estimates and stock call.
Failure to turn around Nesher’s operations
Cadila has indicated that Nesher would record a small loss in FY12 and would turn around in FY13. The
company failure to turn around Nesher may have some impact on our margin assumptions.
Valuations
Earnings CAGR of 13% over FY11-14, compared with 43% over FY08-11
Cadila reported earnings CAGR of 43% over FY08-11, driven by strong growth from the US, India and the
Hospira JV. We expect growth to slow in FY12 and to start recovering from FY13. We expect FY12 to be the
slowest year in Cadila’s history, due to muted US sales, margin stress from a decline in domestic growth,
losses from Nesher and higher GMP costs.
Stock price movement will likely be driven by news flows on US FDA warning letter
Cadila’s US growth depends on product launches, which to some extent may be linked to the clearance of
issues related the sterile unit. Thus, we analyse three scenarios and their impact on earnings.
Base case: Assuming Cadila resolves the warning letter issues by September 2012 and new approvals start
to come through in 2QFY13, we estimate base US revenue growth of 5% for FY13 and 20% for FY14. In this
case, the multiple would remain unchanged at 16x 12-month forward P/E (current valuations).
Bull case: Assuming a resolution in the next six months (as guided by management) and new approvals
start to come through in 1QFY13, we estimate base US revenue growth of 15% each for FY13 and FY14. In
this case, the multiple would improve to 18x 12-month forward P/E (last two-year average).
Bear case: Assuming a resolution takes more time and new approvals are pushed back further, we estimate
base US revenue growth of -5% for FY13 and 5% for FY14. In this case, the multiple would contract to 15x
12-month forward P/E (last five-year average).
The earnings impact in a bull-case scenario is 6%/5% above the base case for FY13/14E and for a bear case
scenario it is -5%/-7% below the base case for FY13/14.
Initiate coverage at HOLD with a target price of INR798
We believe the US FDA warning letter will remain an overhang on Cadila’s valuations in the near term. We
value Cadila at 17x 12-month forward earnings, a 10% discount to its closest peer Lupin (LPC IN, HOLD, CP:
INR472) to reflect the overhang from the warning letter, which gives us a target price of INR798. Our target
price implies just 5% upside potential from current levels, thus we initiate coverage on Cadila with a HOLD
recommendation.
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