US sales rebound a boost for Cadila

Analysts expect the company's earnings to more-than-double in FY13-FY16

The Cadila Healthcare stock has been gaining since November 2013, hitting an all-time high of Rs 1,022 on Tuesday, before closing at Rs 999. The rise can be attributed to the company’s improving prospects in the US business, led by a series of Food and Drug Administration (FDA) approvals for generic launches, including the one for clonidine HCl injections, an analgesic used to provide relief from severe pain.

The stock’s recent performance is in contrast to the underperformance against the Sensex during the first half of 2013-14, owing to the slow rate of approvals from the US FDA and muted domestic sales growth, hit by the NLEM (New List of Essential Medicines).

Cadila’s December quarter results have already started reflecting the positive impact of the new drug launches in the US, despite domestic growth remaining slow. Hitesh Mahida of KR Choksey Shares and Securities says the stock, primarily trading at a discount to its peers due to lack of new abbreviated new drug application (Anda) launches in the US, will continue to see re-rating, with niche approvals kicking in. On February 7, Nomura analysts had said the improvement in margins due to approvals and new launches implied the earnings-cut cycle had come to an end. On Monday, they raised their target price for Cadila from Rs 951 to Rs 1,103. They said the consensus FY14 earnings per share had fallen 24 per cent through the last 12 months and now, more approvals in the US would drive earnings.

The Bloomberg consensus target price of 35 analysts is Rs 1,024. Given the rally, investors with a medium-to-long-term view should consider the stock at dips, as Cadila’s prospects are improving and some events (product launch gains) are yet to be factored in. At Rs 1,009, the stock is trading at a price/earnings ratio of 22 times the FY15 estimated earnings.

US growth picking up
The company’s US sales (about 35 per cent of total) were almost flat during the period between December 2012 and June 2013, ranging at Rs 387-392 crore. However, sales have picked up since then. While the company recorded Rs 473 crore in the September 2013 quarter, US sales grew a strong 33.6 per cent sequentially to Rs 632 crore in the December 2013 quarter. The launch of the generics of migraine treatment drug Depakote ER (estimated to have contributed $25 million) was among the key contributors.

The company is expected to launch anti-depressant Cymbalta generics in this quarter and anti-hypertensive Toprol XL generics and lipid control drug Niaspan generics in the June and September quarters of FY15, respectively. What’s more, the market is looking forward to the generics launch of gastrointestinal drug Prevacid OD. Analysts at Nomura say this launch could add Rs 18 to the FY16 earnings per share, but given the uncertainty around the timing of the approval and exact extent of competition, they conservatively factor in a more sustained contribution of Rs 4.8 a share.

Overall, Cadila has filed 216 Andas (90 approvals received) till date. Of this, 31 were filed during the December 2013 quarter, including niche products—-three injectibles, one nasal spray, four topical and two transdermals. In the third quarter, an Anda was also filed by Nesher (a US-based company acquired by Cadila). This took the total Anda filings to 54 (19 para IVs) last year. Analysts at Nomura say there is a massive increase in Anda filings through the past three years, and the pipeline remains strong. Cadila has forecasted 40 Anda filings in 2015. According to the company’s management, its Nesher facility had been inspected by the FDA during the December quarter, without any 483 observations. Importantly, the management expects Nesher to see a turnaround in terms of profitability in 2014-15.

Domestic sales drag
Domestic sales (40 per cent of consolidated revenues), which were impacted by two product withdrawals and trade related issues, led by NLEM, in the December quarter, are likely to remain under pressure in the near term. The past five quarters (including the December 2013 quarter) have seen almost flat domestic sales (Rs 575-626 crore). According to IMS data, though Cadila rose from the fifth to the fourth spot, domestic sales, at Rs 256 crore for in January, declined 4.7 per cent year-on-year.

The company, however, will see domestic growth improving in a few months, feels Sarabjit Kaur Nangra at Angel Broking. Sarabjit expects the domestic segment to grow at a compounded annual rate of 10.4 per cent in FY2013-15, with the domestic formulation market growing 15 per cent in FY2015. Cadila has launched 12 new products in the domestic market, of which two were firsts in India. The company’s joint ventures are also likely to do better. The Hospira joint venture is expected to grow, owing to 12 new product launches.  In a post-results conference call, the management said the joint venture’s performance had bottomed out. Other joint ventures, such as the one with Takeda, are also likely to witness increased volume off-take. This will improve Cadila’s consolidated performance in time.