Cadila Healthcare: Not many pain-points

Indian pharmaceutical companies seem to be finally turning the corner, bringing relief to investors. Improving financials due to subsiding pricing pressure in the US, coupled with recovering domestic business, have meant better prospects for the firms. Though it appears that the worst is behind them, the recovery seems to be gradual for these companies, given the lower generic opportunity in the US, rising competition and continuing regulatory overdrive on domestic plants.

However, firms having a strong domestic presence — apart from a growing US business — with a focus on niche, high-margin, specialty complex generics, are likely to deliver better performance in the medium and long run.

Cadila Healthcare is one such company that can deliver on multiple fronts. Strong domestic presence, growing US pipeline — especially in complex generics and biologics, which have high entry barriers — and a robust position in high-growth therapeutic areas, including dermatology, pain management, respiratory and cardiology, are positives.

The stock had declined 35 per cent from its November 2017 highs. Though the company reported a stable set of numbers during the period, concerns about increased competition in its recently-launched generic drugs in the US and weak market sentiment towards pharma stocks have taken a toll. However, the stock has bounced back from its lows lately, as the company’s earnings visibility has improved and the correction itself may have been overdone.

At the current price of ₹408, the stock trades at about 20 times its estimated 2019-20 earnings, compared with its three-year historical average of 28 times. Given its established brands, a large and therapeutic-focussed field force, in-licensing agreements and product launches, the valuations appear expensive. Investors with a two- to three-year time horizon can consider buying the stock.

Cadila Healthcare is one of the top five pharma companies in India, with a market share of 4.2 per cent and one of the top 10 generic players (based on prescriptions) in the US. With a well-diversified business across geographies, the company has presence in generics, branded generics, animal health, consumer wellness and others. It has established a presence in other branded drugs and in markets such as Brazil, Mexico and South Africa.

The company has demonstrated robust growth over the last decade (FY 08-18) with the compounded annualised growth of 18 per cent and 21 per cent in its consolidated revenue and net profit, respectively.

US, a key growth driver

Cadila’s US business, which contributes 50 per cent of the overall revenue, has been the key growth driver for the company. Though the company faced multiple headwinds in the US market over the last five years — repeated warning letters (in FY12 and FY16) from the USFDA for its Moraiya facility and immense pricing pressure in key drugs — it managed to grow by 31 per cent CAGR in FY13-18 in the US, driven by aggressive filings and product launches.

In FY18, its US business grew 62 per cent, led by blockbuster launches such as the generic version of Lialda and Tamiflu. A slew of approvals after clearance of the Moraiya plant and sustained revenue stream from Asacol AG have offset pricing pressure in the existing drugs.

The company received a windfall gain of around $250 million from the exclusivity in the sale of the generic Lialda in FY18. The gain from the generic Lialda is likely to continue (albeit in a restricted manner) due to limited competition in the space, with the only other entrant being Teva that entered the fray in 2018.

Going ahead, the company’s US business is expected to grow on the back of the ramp-up in product launches.

The management has guided for 50+ product launches in the US in FY19. Its US pipeline (cumulative) consists of 330 filed ANDAs, and 144 pending final approvals. The company’s shift in focus towards building its specialty pipeline in the US in pain management, dermatology and oncology products should pay off well in one to two years.

Strong domestic presence

Cadila’s domestic business, which contributes 29 per cent of overall revenue, grew by 8 per cent CAGR driven by new launches. The company enjoys leadership position in the high-growth lifestyle segments such as gastrointestinal, cardiology, respiratory and gynaecology, which accounted for over 40 per cent of its domestic formulation sales. The company’s India business is expected to grow on the back of new launches and acquisitions.

Niche opportunity

Cadila is one of the few companies making an entry into the highly expensive, complex, biosimilar products business. The company owns a pipeline of 21 biosimilars and six novel biologics. Similarly, it owns 13 vaccines in different stages of development. In FY18, the biosimilar sales were at ₹250 crore, largely from India. The company expects biosimilar sales to reach $200 million and, including vaccine, both sales are likely to reach $500 million over the next three to four years.

Cadila’s R&D expenses remain around 7-8 per cent of total sales. The company clocked revenues of about ₹11,905 crore and profit of about ₹2,848 crore in 2017-18. In the first quarter of 2018-19, the company’s consolidated revenue grew (year-on-year) by 32 per cent to ₹2,894 crore, while the net profit grew by 233 per cent to ₹461 crore. Its operating profit margin stood at a healthy 22 per cent in the period.

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