Near-term triggers for Cadila Healthcare

December quarter earnings seen as muted; product approval and acquisition plans hold key

Cadila Healthcare stock has gained 3.4 per cent this week on a product approval, acquisition plans in the US, and expectations of improving performance in the Indian formulations business. The immediate trigger has been the US Food and Drug Administration (FDA) go-ahead to market cancer treatment drug Methotrexate. Morgan Stanley analysts believe Cadila can generate sales of $15-20 million annually while net profit will be boosted four-six per cent for FY18. The total market size for the drug is over $200 million per year. 

The other reason for investor interest in the stock are reports the company is planning to buy US-based Sentynl Therapeutics for $171 million. The US company markets the brand Abstral, which is a pain management drug prescribed for cancer market. The acquisition, according to analysts, gets the company access to a manufacturing facility in the US making controlled substances such as Abstral, which are opioid-based, with properties similar to opium. Given that the production is tightly controlled and licensed, it is a high-margin, low-competition drug. Further, given the limited US launches due to FDA issues at its Moraiya plant, product additions from the acquired entity will help it keep incremental revenue flows growing.

In addition, the Street will keep an eye out for December quarter results. Revenues from the US, which account for 42 per cent of total, should see a four per cent sequential increase, given the upside from sales of anti-inflammatory drug Asacol in a limited competition market. Price erosion in its other products including HCQS (Hydroxychloroquine, used for rheumatoid arthritis, etc) and no major approvals, will mean that over the year-ago period, US sales are expected to fall five per cent. Domestic formulations, which account for 31 per cent of revenues, are expected to report a muted six per cent year-on-year growth due to demonetisation. But, beyond December quarter, analysts say growth is expected to pick up as things come back to normal. 

While the company has a significantly large pipeline, which includes 275 abbreviated new drug applications since FY04 and approvals for 105 of those, analysts are not giving adequate valuations to the stock, due to pricing pressure in the US, unresolved issues related to Moraiya plant, and US Department of Justice price-fixing probe. The Moraiya plant US FDA resolution will boost the company's long-term visibility and is a key rerating trigger for the stock as it will bring the large pipeline, which has not yet been approved, into play.