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Monday, September 28, 2009

Cadila Healthcare


Investors with a long-term perspective can consider adding the stock of Cadila Healthcare to their portfolio. Though the stock price has gained considerably in the recent rally, improving visibility in the company’s exports earnings besides its positioning in the domestic market make a strong case for investing in it. Better growth expectations from its joint venture with the US-based Hospira also underscore our recommendation. At the current market price of Rs 518, the stock trades at about 17 times its likely FY-10 per share earnings.

While this is , the company’s stronghold in the US generics space in addition to its expanding presence in other key markets lend confidence to its ability to maintain the overall growth momentum over the next couple of years.
Exports to drive growth

The pro-generic healthcare reforms in the US and other key markets in Europe, Japan and other emerging markets are likely to provide the much-needed thrust to Cadila’s exports.

The company already has a fair standing in the US, with 25 products in the market and 48 ANDAs and 79 filings and plans to further add to this by filing 12-15 ANDAs per year. Its approach, however, is comparatively less risky than some of its peers as the company plans to desist from sole (first-to-file) FTF opportunities.

To that extent, it may also not enjoy the upsides from blockbuster sales. The management has guided for a 50 per cent growth in the US sales for the year. This appears reasonable given the heady sales the region enjoyed in the first quarter.

In the just ended quarter, the US grew strongly by 81 per cent over the corresponding previous period helped by product launches.

The overall export performance remained healthy, but for Brazil, which de-grew by 14 per cent due to delay in customs clearance of products. Cadila’s presence in Europe and Japan (at present insignificant) also holds immense revenue potential.
Domestic stronghold

Cadila’s presence in high-margin therapeutic segments such as female health, CVS and gastrointestinal drugs in addition to cosmeceuticals and animal health products are likely to help it deliver strong growth on the domestic front.

In what may only be early signs, the company came out with a strong set of numbers in the June quarter, when it reported a domestic sales growth of 13 per cent. Cadila launched 17 products, including extensions of existing products, last quarter. Harping on product launches and strong sales force, the management expects its domestic formulation business to grow by 13-15 per cent for the year.

Zydus Wellness, the consumer business of Cadila Healthcare that was carved out into a new company (70 per cent Cadila’s stake and is listed) is also expected to report healthy growth.

The consumer healthcare business, which owns the brands Sugar Free, Nutralite and Everyuth, posted a healthy 22 per cent growth during the quarter.
High contributions

Cadila’s joint venture with Nycomed, which supplies final active ingredient for Pantoprazole drug, is likely to see a fall in revenues in the next couple of years as the drug is set to lose patent by February 2011 in the US.

However, the extent of fall in revenues may not be as drastic as the JV continued to see better-than-expected growth in revenues even last quarter. Despite the loss of exclusivity in Canada and Europe, the global net turnover of Pantoprazole remained broadly stable for Nycomed in its second quarter. Wyeth, which sells the drug in the US, also saw better-than-expected sales, although part of that increase came from sales of Wyeth’s own generic version of the drug.

But on the whole, both Wyeth and Nycomed were able to maintain their volume share of the drug in the June 2009 quarter. And that Nycomed has begun sourcing the API exclusively from the joint venture instead of multiple suppliers may also help the cause of the JV company. What’s more, from June 2010 onwards, the scope of the Nycomed JV may get further expanded as the former is expected to source additional APIs. That said, the Nycomed JV might also not continue to operate at its earlier profitability levels.

The management, therefore, has given lower revenue guidance; it believes that Nycomed JV will contribute Rs 60 crore to the topline and Rs 35 crore to the bottomline this year compared to Rs 99 crore and Rs 68 crore in FY-9. But even as there would be a fall in revenues from this joint venture, the company’s newly operational JV with Hospira promises to offset the shortfall to a great extent.

Having commenced operations from May 2009, this JV reported Rs 23 crore and Rs 6 crore revenue and profits last quarter (Cadila’s share of pie in the two months of its operations).

The management has given a revenue guidance of Rs 60-80 crore from the Hospira JV this year. This company, which currently manufactures three products catering to the EU region, is expected to scale up to four by the third quarter.

via BL