Subdued growth outlook for Cadila

After FDA warning letter for its Moraiya unit, new product approvals after site transfers might take 2-3 quarters

Cadila Healthcare's performance for the quarter ending December ’15 has encouraged the Street. The stock closed half a per cent higher at Rs 327.40, on a day when the S&P BSE Sensex closed a little more than one per cent less.

The results might have allayed some of the Street’s worry on the company’s base business after the US drug regulator’s alerts on its Moraiya and Zyfine facilities. However, the growth will remain subdued for some quarters, till approvals come for new launches.

The US Food and Drug Administration's (FDA’s) warning letters at end-December on Moraiya and Zyfine had led to a fall by almost a fourth in the stock price. It was at a 52-week low of Rs 285 last Friday. The Moraiya facility contributes about 60 per cent to the company’s US revenue and while imports from this to the US haven't been stopped, new approvals for launches that are key for future growth will not come.

The good news is that the facility at Baddi, Himachal Pradesh, has got clearance from the FDA, after inspections. Hence, the company has a facility and Special Economic Zone (SEZ) from where new product launches can be looked at, through site transfers. Still, with the time taken and procedures involved, analysts believe it will be at least two or three quarters before this would be feasible from Baddi.

Site transfers

For the quarter ending December, the US business (46 per cent of total sales) clocked Rs 1,072 crore in revenue, up 20 per cent over a year. The generics of malarial drug hydroxychloroquine continues to drive growth. Though there has been no competition yet, there are indications of some pressure on pricing and volumes, say analysts. Among other generics, prostrate treatment drug tamsulosin, kidney drug potassium citrate and pain-relief morphine ER continue contributing to growth.  

With some indications of price erosion and the fact that an existing product range always comes under competitive pressure, sooner or later, approval for new launches are essential to drive growth. Thus, the launch of products such as gastro treatment Asacol HD, Prevacid solutab, and anti-hypertensive Toprol XL, etc, will be essential. Since the products were filed from Moraiya, the company is looking for site transfers.

However, the procedure and time involved makes analysts wary in their expectations on timelines. Being roughly halfway (six months) in the process, the company believes it might be able to launch about 15 products in calendar year 2016. Site transfer generally takes 12 to 18 months and analysts at Morgan Stanley expect the base business to remain muted over the next two to three quarters, until the visibility of niche site transfers improve. Analysts at UBS say the warning letter does delay approvals for the US market and would impact the numbers over coming quarters. A cautious approach prevails.

Domestic sales (a fourth of overall revenue) continue to be led by hepatitis treatment drug sofosbuvir. However, there was some adverse impact from price cuts and discontinued businesses. The growth, thereby, was a modest 11 per cent. There might also be some challenges from the new list of essential medicines coming into force from the start of FY17. Cadila, however, expects the domestic business growth to improve to 15 per cent by the second half of FY17.

Overall, looking at the near-term challenges, analysts have a 'neutral' to 'accumulate' rating. However, analysts at Morgan Stanley remain overweight (target price of Rs 399), in view of the strong FY18 growth driven by the US launches, product range and reasonable valuations. Analysts at HSBC have built in a recovery in FY18, led by Baddi and the SEZ site. However, they maintain a 'hold' rating, while revising the target price to Rs 338. Analysts at IIFL also see major approvals by FY18 and retain an 'accumulate' rating, with an unchanged one-year target of Rs 350. UBS has a 'neutral' rating, with a price target of Rs 375.

All these suggest the stock might have factored in the concerns. Thus, long-term investors could accumulate on correction.