US sales give Cadila Healthcare an edge over peers

Faster product-approval rate leads to higher earnings growth visibility

The Cadila Healthcare stock gained seven per cent in trade on Thursday on a slew of product approvals in recent weeks as well as on upgrades by brokerages. Over the past two weeks, Cadila has received seven product approvals with the latest being for anti-hypertensive generic tablets. After its Moraiya plant got the US Food and Drug Administration’s (FDA’s) go ahead this June, the number of approvals have gone up substantially. The plant had been under the US FDA’s scanner for quite some time, limiting the company’s options as far as the US market was concerned.

Credit Suisse gave an outperform rating to the company on Thursday. This was on the back of high earnings visibility and US FDA-compliant facilities. The rating was the key reason for the stock to gain almost nine per cent in intra-day trades before closing at Rs 494.95, up seven per cent.

The Street’s sentiments remain upbeat on the company’s US growth prospects as it has a strong pending product pipeline. Of more than 300 products filed for approval in the US, more than half are on the pending list. The approval rate had remained soft during the past few years and was the key reason for poor US sales. Now, with the issues being resolved, the company is witnessing a higher rate of approvals.

In the current environment where competitive intensity and hence pricing pressure remains high, the faster pace of generic launches is key to growth. The company was among a few that exhibited 18 per cent year-on-year (y-o-y) growth in the US during the June quarter in constant currency terms, though it was also fuelled by the acquisition of Sentynl Therapeutics. The growth momentum is expected to remain strong as the company has received approval for the generic version of Lialda, a drug used to treat ulcerative colitis with annual sales of $1.14 billion. 

The generic is likely to be marketed on exclusivity and will start contributing to the revenues from the September quarter. The product is also difficult to manufacture and hence may see lower competition. Analysts at Credit Suisse say Cadila has a limited downside as the stock has already factored in more competition in the form of Teva and Mylan.

The company has also got approval for the launch of Asacol HD. It had earlier launched authorised generics of the drug used to treat inflammatory bowel disease, as its own product approval was delayed because of pending clearance of the Moraiya plant. But, now with the launch approval from the US FDA and settlement with the innovator, Cadila can launch its own generics in FY19. Credit Suisse says visibility of FY19 growth has increased with the approval of Asacol HD. 

They also see the launch momentum staying strong for Cadila, following key approvals expected over the next six months and the second half of FY18 benefiting from seasonal products such as Tamiflu capsules (influenza treatment drug) and Ribavirin (Anti-flu). Analysts at Edelweiss say approvals for other niche product-generics such as Toprol (anti-hypertensive), Prevacid ODT (acid control drug) and transdermals were also expected in the next one year, which they believe will lead to best-in-class US growth among peers.

The stock prices had come under pressure with goods and service tax (GST)-led destocking impacting domestic growth in Q1. This was an opportunity for investors to add the stock to their portfolios. With GST-led destocking behind, domestic growth should pick up the pace. After the soft June quarter results, analysts at Edelweiss had cut FY18/FY19 earnings by nine per cent and three per cent, respectively. They have a price target Rs 580 while Credit Suisse has a target of Rs 540.