Strong US business to drive Cadila Healthcare growth

Analysts believe growth worries for the base business are behind it and expect H2 to be much better

The Cadila Healthcare scrip has seen a strong rally, gaining 31 per cent on the bourses since July. The momentum caught pace after the September quarter results and the stock is trading close to its 52-week high.
 
While the results were nothing to write home about, it is the expectation of growth in the second half of the financial year that has been driving the stock prices.
 
The company’s Moraiya (Gujarat) unit had come under a US Food and Drug Administration (FDA) scanner, receiving a warning letter in early January. This impacted new product launches in that market. While the company was able to maintain growth from sales of anti-malarial and arthritis drug hydroxychloroquine (HCQS) to the US, this revenue stream was also impacted due to pricing pressure as new competitors launched their versions.
 

 

Respite, however, came in July when the company launched authorised generics of colitis treatment drug Asacol HD. This has given its US sales some momentum, as was visible in the September quarter performance. US sales grew 16.6 per cent sequentially and were marginally down (1.5 per cent) year-on-year. The newly launched generics contributed $20-25 million during the quarter, according to Religare Institutional Research estimates.
 
Also, analysts now believe growth worries about the company’s base business (existing portfolio) is likely to be behind it. Analysts at Morgan Stanley say most of the impact of price erosion from HCQS is already reflected in the current US base business. Thus expectations are that the second half of FY17 will be much better. Further, the Street is estimating a few more generic approvals to come. These could be Lialda (for colitis), Toprol XL (anti-hypertensive) and transdermal products.
 

While the Moraiya unit is still awaiting clearance by the FDA, approvals are expected to come from its Special Economic Zone in Baddi, Himachal, and the Nesher facility in the US. Analysts at Morgan Stanley expect the second half of FY17 to be driven by sales from seven or eight approvals, including three of four controlled substances from Nesher. They expect strong growth momentum from FY18 on, largely driven by approvals for a few niche drugs which have been transferred to sites unaffected by the FDA issues. Thus, they have built in a target price of Rs 439 for the stock, trading at Rs 417.
 
Though other brokerages have a positive view on the company, they remain watchful on Moraiya clearances. The company has completed the remediation measures and invited FDA for inspection and clearance. If the facility gets a go-ahead, it will be the most important trigger for the stock.
 
Analysts at Religare say the company’s US business is at an inflection point, with several key launches slated (Lialda, Prevacid, Toprol), once the Moraiya issues are resolved.