Cadila's prospects hinge on US growth

New drug discovery will add substantially to domestic revenues over a year's time, while US product launches, growth remains essential to drive earnings & margins in near term

Cadila Healthcare’s announcement for approval of India’s first Novel Chemical entity comes as a cool breeze for the pharma Industry. It comes at a time when the Indian Pharma Industry has been embarrassed by the issues as those of Ranbaxy followed by Wockhardt also getting an import alert from the USFDA. The drug discovery is indeed an achievement for Cadila, which has pioneered a molecule, “becoming first Indian company ever to do so.

Furthermore, Cadila derives pride from the fact that the molecule used for treating Diabetes as well as having Cholesterol lowering abilities is also the first in its own class of drugs (Glitazars) to be approved in the world. It has beaten a number of companies who are doing research on Glitazars around the world.

The development should instigate strong confidence in investors for the company that has underperformed for some time on the bourses. The underperformance has been on the back of lower-than-expected ramp-up in US revenues. With US growth being a drag, the margins, too, have suffered.

However, this can change if the company gets the required approvals in the US during FY14. Doing this, margins, too, can improve. The newly discovered product to be launched in second half of FY14 will start providing some support to the domestic revenues though material benefits will flow in FY15.
 
Pioneering a breakthrough

Zydus Cadila’s research molecule. “seroglitazar’ to be marketed under brand name 'Lipaglyn' providing dual benefits of treating diabetes (Glycemia) as well as reduction of Cholesterol is likely to be launched in December’13 quarter. Mr Pankaj R Patel, Chairman and MD Cadila expects the product to become a Rs 100-crore brand in India in next three years.

The company after getting approvals in India is going to file for approvals in the US as well as other geographies. The product has been developed over a period of 13 years at an investment of around $250 million. The company is planning to invest around $100 million more in the process of getting approvals in developed markets and other countries said Mr Patel. This is the first success that Cadila has seen from the armory of nine products under various stages of development.

Commenting on the development Hitesh Mahida, analyst at Fortune capital, said that the development is positive though guidance Rs 100 crore in first three years of launch seems aggressive.

US business

While the new product approval and launch is positive, the upside for the stock hinges on traction in the US business. Monica Joshi at Avendus Research post FY13 results had observed that Product launches in the US are trickling in, but not materially contributing to earnings. US business had just seen a 9% year-on-year growth during March’13 quarter. Joshi observed that this, however, could change as the number of approvals and the quality of new launches .

Approval for launch of products as injectibles, a nasal spray in FY14 (whose manufacturing facility had been inspected by USFDA) a transdermal towards end of FY14 as FDA inspection of facility is pending and other products as generics of Asacol used for treatment of Ulcerative colitis and  anti-hypertensive product Toprol XL etc. All are essential for achieving the guided 20 percent growth in the US generic sales and Joshi observes that the inability to deliver scale in the business could impact valuations.

Dr Sharvi P Patel Deputy MD Cadila said that they should be able to launch 12-14 products in the US during FY14 depending on approvals. He added that company is banking on Biosimilars, vaccines and transdermals to drive growth.

Pharma pricing policy headwinds

The new drug policy is likely to impact 2.5% of the domestic sales as per Nomura estimates. The domestic business contributes about 47% to overall revenues for the company. However the company plans to continue launching 40-50 products every year which should mitigate the losses observed Pankaj Patel. The new research product too should add to domestic growth and materially impact will be seen in FY15.

For the stock trading at Rs 778.45, consensus target price as per Bloomberg data stands at Rs 880 indicating an almost 13% upside. However, taking into consideration the new drug discovered, Sarabjit Kaur Nangra feels that on a conservative basis the company can add Rs30-50cr in FY15 on the sales front and she maintains a buy with a price target of Rs 940.