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Cadila Healthcare (CDH)
Pharmaceuticals
Biochem—third acquisition of 2011. Cadila closes the year with its third
acquisition—Biochem is the 37th largest company in India by sales with revenues of
Rs3.2 bn, growing at 24% as per MAT Oct 2011 data. We estimate acquisition price
may be at the most around Rs5.4 bn or 1.4X sales. We remain concerned as
(1) Biochem is an anti-infectives company exhibiting high degree of product
concentration, and (2) the deal is marginally EPS accretive. Maintain REDUCE; target
price Rs765.
Trying to buy growth in India through an anti-infectives company is not inspiring
As per IMS data (MAT Oct 2011), Biochem is the 37th largest company (by sales) in India with
revenues of Rs3.2 bn, growing at 24% yoy. However, due to high-exposure to anti-infectives,
growth dipped in recent months to 10-14% in line with overall decline in the anti-infectives
market. We however remain concerned as (1) Biochem is primarily an anti-infectives company,
which would skew the already lower presence of Cadila in the fast-growing chronic segments.
Cadila also has limited presence in anti-infectives which constituted 10% of its overall sales and
(2) Biochem exhibits high degree of product concentration. The Top 5 brands of Biochem are
antibiotics which constitute 40% of its overall sales.
We estimate acquisition price is at the most around Rs5.4 bn or 1.4X sales
As of September 2011, Cadila had debt of Rs19.8 bn, up Rs8.8 bn from March 2011 with D/E at
0.8X. The company confirmed that the increase in debt YTD was due to the acquisitions. We
estimate Cadila acquired Nesher Pharma at US$60 mn (at near book value) and Bremer Pharma at
US$14 mn (1X sales, sales of Bremer Pharma was Rs84 mn for part of 2QFY12) implying Rs5.4 bn
of debt raised towards the Biochem acquisition. We estimate the deal involves the purchase of the
manufacturing facility and is marginally accretive adding around 1.7% to overall FY2013E EPS (see
Exhibit 1). We await the closure of the deal and more details before revising our estimates.
Warning letter resolution is key stock trigger
While we factor in 20% organic sales growth in US in FY2013E, this is contingent on resolution of
the warning letter, which the company has indicated should happen by June 2012E. However in
absence of a resolution, US growth will falter as sustaining US growth on existing products with
no new products flow would be difficult. This remains the key stock trigger in the near term.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cadila Healthcare (CDH)
Pharmaceuticals
Biochem—third acquisition of 2011. Cadila closes the year with its third
acquisition—Biochem is the 37th largest company in India by sales with revenues of
Rs3.2 bn, growing at 24% as per MAT Oct 2011 data. We estimate acquisition price
may be at the most around Rs5.4 bn or 1.4X sales. We remain concerned as
(1) Biochem is an anti-infectives company exhibiting high degree of product
concentration, and (2) the deal is marginally EPS accretive. Maintain REDUCE; target
price Rs765.
Trying to buy growth in India through an anti-infectives company is not inspiring
As per IMS data (MAT Oct 2011), Biochem is the 37th largest company (by sales) in India with
revenues of Rs3.2 bn, growing at 24% yoy. However, due to high-exposure to anti-infectives,
growth dipped in recent months to 10-14% in line with overall decline in the anti-infectives
market. We however remain concerned as (1) Biochem is primarily an anti-infectives company,
which would skew the already lower presence of Cadila in the fast-growing chronic segments.
Cadila also has limited presence in anti-infectives which constituted 10% of its overall sales and
(2) Biochem exhibits high degree of product concentration. The Top 5 brands of Biochem are
antibiotics which constitute 40% of its overall sales.
We estimate acquisition price is at the most around Rs5.4 bn or 1.4X sales
As of September 2011, Cadila had debt of Rs19.8 bn, up Rs8.8 bn from March 2011 with D/E at
0.8X. The company confirmed that the increase in debt YTD was due to the acquisitions. We
estimate Cadila acquired Nesher Pharma at US$60 mn (at near book value) and Bremer Pharma at
US$14 mn (1X sales, sales of Bremer Pharma was Rs84 mn for part of 2QFY12) implying Rs5.4 bn
of debt raised towards the Biochem acquisition. We estimate the deal involves the purchase of the
manufacturing facility and is marginally accretive adding around 1.7% to overall FY2013E EPS (see
Exhibit 1). We await the closure of the deal and more details before revising our estimates.
Warning letter resolution is key stock trigger
While we factor in 20% organic sales growth in US in FY2013E, this is contingent on resolution of
the warning letter, which the company has indicated should happen by June 2012E. However in
absence of a resolution, US growth will falter as sustaining US growth on existing products with
no new products flow would be difficult. This remains the key stock trigger in the near term.
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