Cadila Healthcare: Buy :: Business Line

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A recovery in the US market on the back of new launches and steady performance in the domestic formulation business may hold Cadila Healthcare in good stead over the next two years.

A sedate financial performance over the last three quarters led to an over 8 per cent fall in the stock price in the last six months. At the current market price of Rs 770, the stock trades at 15.5 times its estimated 2014-15 earnings, the lower end of its historical band. Investors with a one-to-two year investment horizon can consider buying the stock.

US ON RECOVERY PATH

Cadila derives close to a fourth of its revenues from formulation sales in the US market. The company managed a healthy 30 per cent annual growth over the last four years, driven by a slew of product launches.

This was also aided by temporary exit of select competing players due to regulatory issues.

The growth however slowed in 2011-12 after the company received a warning letter from the US FDA (US Food and Drug Administration) for its Moraiyya facility in June 2011.

But, with concerted efforts, Cadila managed to get the facility back on track within a year.

Despite the re-approval, launches have been delayed due to longer approval timelines by the US drug regulator. Price erosion in the existing portfolio has led to slower growth in this market.

The revenue growth in the US fell from 44 per cent in 2010-11 to 21.2 per cent by 2012-13. Now, with a pick-up in the pace of product approvals by the drug regulator, the management expects US business to return to a stronger growth trajectory by the second half of this fiscal.

Cadila has filed for 173 products so far and is awaiting approval for nearly 97 products. These include drugs with new delivery systems such as transdermal patches, nasal sprays, inhalers and injectables with a relatively low competitive intensity.

ROBUST DOMESTIC GROWTH

Domestic formulations account for over a third of the company’s revenues. Therapies for acute ailments, which have short treatment duration, account for three-fourth of Cadila’s revenues. The company’s revenues in the home market have grown at 17 per cent annually in the last four years.

The successful integration of Biochem Pharma acquired in 2011, provided a leg up to Cadila’s domestic operations. Even as the domestic industry slowed to 11.8 per cent from mid-teens, the company posted a strong 22.6 per cent growth in 2012-13, helped by over 90 product launches.

Cadila’s announced approval of its novel drug Lipaglyn for treatment of dyslipidemia (abnormal amounts of cholesterol) in diabetic patients by the Indian regulator DCGI (Drug Controller General of India) last week. Over 300 million people suffer from diabetic dislipidemia globally.

This is the first drug to be approved in that category, globally. Also, Cadila has been the first Indian company to taste success in innovative research by securing marketing approval from the Indian regulator. Cadila hopes to clock Rs 100 crore from this product over a five-year period.

The company is in the process of filing the product in the US, Europe and other emerging markets.

CONSUMER BUSINESS BACK ON TRACK

The consumer business, Zydus Wellness, in which Cadila holds over 72 per cent stake, has seen healthy pick up in growth over the last two quarters.

The company’s re-branding strategy for key brands — Sugar-free and EverYuth — seems to be paying off. It also launched variants of Everyuth face washes and scrubs last year. Zydus also launched a premium variant of margarine brand Nutralite with Omega 3 fatty acid. All these have helped Zydus tread the recovery path.

The company posted almost 28 per cent growth in revenues during the March quarter. It also managed to improve operating margins to 29.3 per cent last quarter from 16.4 per cent in the June 2012 quarter.

Cadila’s profits from its joint venture with Hospira were impacted by pricing pressure on select products due to competition. But, the joint venture has started supplying two more products to the US market and one additional product in the European market.

Similarly, Cadila-Nycomed joint venture commenced supplies of two more products last fiscal. This may support Cadila’s revenues from joint ventures even as the segment’s margins may not improve significantly from here.

The company’s performance in the European market gained strength last fiscal, posting 24 per cent growth in 2012-13.

Brazilian sales have been impeded by regulatory delays and slow product approvals over the last few quarters. However, this may be negated by steady domestic sales and growth step up in the US market.

The company’s revenues grew over 21 per cent in 2012-13 compared with the same period last year.

The operating margins slipped to 17.7 per cent in 2012-13 compared to 20.6 per cent the previous year, largely due to slow growth in the US and pricing pressure in the JVs.

But, with approvals for new products likely to kick in, margins are expected to improve beginning second half of the fiscal.

Net profit for the period grew by a modest 2 per cent to Rs 655 crore.