Competition clouds Cadila Healthcare's FY19 profit

Approval to Teva for key drug Lialda and sustained price erosion lead to stock downgrades

The Cadila Healthcare stock shed nearly seven per cent in two trading sessions as higher competition for a key drug led brokerages to lower the company’s earnings estimates and downgrade the stock.

The drug, Lialda, is used in treating ulcerative colitis and 30-40 per cent of Cadila Healthcare’s estimated profits in 2017-18 are expected to be derived from it. 
 

The company is also facing scrutiny by the Central Drugs Standard Control Organisation for launching a combination drug to treat hypertension without mandatory approval. This has affected sentiment, but investors will look more to the US market and the company’s medium-term outlook. 

 

The contribution of Lialda beyond 2017-18 is, in addition to approval by the US Food and Drug Administration (FDA) for the company’s plant in Moraiya, an important trigger for the Cadila Healthcare stock. The company has a six-month exclusivity period on Lialda, during which it is the only manufacturer, apart from the innovator and authorised generic maker, that can market the drug. The exclusivity period ends in January, 2018. 

While there is no threat to Cadila Healthcare’s revenue within the exclusivity period, investors were expecting an extended phase of limited competition after its expiry. However, an approval to Teva means Cadila Healthcare will face competition over Lialda earlier than expected. 

The effects of this on sales of Lialda (total market size of about $1 billion) will be significant for Cadila Healthcare in 2018-19 and 2019-20. Other competitors that will launch generic versions of the drug starting in 2018-19 are Lupin, Anmeal and Osmotica.

 

Analysts at Credit Suisse expect Lialda to be sold by four generic drug makers and Cadila Healthcare’s cash flows from this drug to halve in 2018-19. The brokerage has lowered Cadila Healthcare’s earning estimates for the next two financial years by 4-10 per cent and has reduced the target price of the stock from Rs 540 to Rs 465. 

Cadila Healthcare is also facing shrinking revenue from other key drugs like the anti-inflammatory Asacol HD. Revenue from this drug, which was as high as $100 million a quarter in 2016, is down by half. Analysts at IIFL said the market size for this drug would shrink as Cadila Healthcare, which is now selling the authorised generic, prepares to launch its own generic version in the next quarter. Cadila Healthcare now pays a royalty for selling the authorised generic version of Asacol HD.

IIFL’s Abhishek Sharma and Rahul Jeewani, who downgraded the Cadila Healthcare stock in September because of an expensive valuation and increasing competitive intensity for Lialda, reiterated their rating in a report on Friday, citing the company’s inordinate dependence on the US market. They have lowered their estimate of Cadila Healthcare’s 2018-19 earnings per share by five per cent and have a target price of Rs 390 for the stock, 16 per cent lower than its current price.

Although this is a setback for Cadila, the company’s base business in the US is expected to provide support. Neha Manpuria of JPMorgan said Cadila Healthcare’s business growth in the US would be aided by a 15 per cent improvement in sales of the company’s drug pipeline after FDA clearance for the Moraiya plant. The unit accounted for 40 per cent of Cadila Healthcare’s pending drug pipeline before receiving the FDA clearance.

The next trigger will be the company’s September quarter results, which are due this week. Unlike its rivals, analysts expect Cadila Healthcare to report 20 per cent growth in revenue and even more robust operating and net profit. This is due to the Lialda launch, weak competition for migraine drug Eletriptan and price and volume gains from blood pressure medicine Atenolol. Most analysts expect the December quarter earnings will be the peak for Cadila Healthcare before competition begins to eat into key product opportunities.

At its current price, the Cadila Healthcare stock is trading at about 20-30 times its 2018-19 earnings estimates. Analysts said the stock’s re-rating since the FDA approval for the Moraiya plant and the Lialda opportunity had factored in large upsides. Given this (Lialda upside from January 2018) is now in doubt, the stock’s valuation at a premium to its peers might not be justified.