Cadila Healthcare: Buy

Good results, bright prospects in the domestic and export markets and better growth expectations from its joint venture companies make Cadila Healthcare a good investment bet for the long-term.

At the current market price of Rs 812, the stock trades at about 21 times its likely FY-12 per share earnings.

While this isn't cheap, the company's stronghold in US generics, in addition to its expanding presence in other key markets, lends confidence. Cadila's presence in the high-margin domestic consumer markets, through its listed subsidiary, Zydus Wellness, also adds to the stock's attractiveness.

Growth drivers

Cadila's presence in the very profitable therapeutic segments such as female healthcare, CVS and gastrointestinal drugs, in addition to cosmeceuticals and animal health products position it strongly on the domestic front.

That over 16 of its brands feature among the country's top 300 brands stands testimony to its fairly strong position in the domestic market. It is the fifth largest player in the domestic market, with a market share of about 3.7 per cent.

The key to its growth, however, are the new product launches. As a growth strategy, the company has regularly added products to its portfolio. It launched more than 45 products in the six months between April-Sep 2010 (18 were first-in-India launches).

In the December quarter alone, it launched nine products in the domestic formulation market (including line extensions and ‘Ostigard 100', first-in-India launch). In-licensing agreements with major global pharmaceutical players such as Bayer Schering Pharma, Nycomed, Baxter and Genzyme Inc for manufacturing and marketing their patented products too have added to its product strength.

Cadila has supported the additions to its product offerings with a suitable increase in its field force too. It currently has about 4,400 therapy-focused agents and over 1.2 lakh doctors under coverage.

It recently expanded its field force in the cardiology by 300 and respiratory by 100 agents, while in FY-10, it had formed Zydus Cardiva, with a specific focus on urban markets with a range of anti-hypertensive and aspirin combinations. Such focused therapeutic approaches have helped the company improve its growth rates.

Export formulations

Cadila is now looking to improve its presence in the under-penetrated semi-urban and rural areas, both of which offer it a vast growth opportunity. The company, therefore, can be expected to maintain its growth trajectory of over 15 per cent in the years to come.

The pro-generic healthcare reforms in the US, Europe, Japan as well as in some of the emerging markets are likely to provide the much-needed thrust to Cadila's exports. It already has a fair standing in the US with 118 ANDAs, 96 DMFs and 59 approved drug applications. US revenues have grown (on a lower base) at a compounded growth rate of about 90 per cent in the four years to FY-10 to Rs 672 crore.

New product launches and improvement in the market share of existing products are likely to help it sustain growth in the market. The company plans to add 16-18 ANDAs in the US for the next two-three years (this includes P-IVs and niche products). Cadila's presence in Japan, though not very significant now, holds immense revenue potential.

Contributions from TIE-UPS

Cadila's joint venture with Nycomed, which supplies final API for Pantoprazole drug, reported a 103 per cent increase in its revenues to Rs 14.6 crore in the December quarter.

The joint venture is also expected to begin supplies for the 14 APIs next fiscal year onwards. Its revenue contributions, however, are likely to fall in the coming quarters as the Pantoprazole drug is set to lose patent by Feb 2011 in the US.

Improving contributions from its Hospira joint venture, which sells oncology injectables, are expected to eclipse the falling contributions from the Nycomed JVC. Under the agreement, Cadila would be supplying six products. It has so far launched three products in the EU and anticipates shipments to the US to commence in the subsequent quarters with Docetaxel launch (awaits final approval). In the latest quarter, Zydus Hospira's revenues increased by over 97 per cent to Rs 37 crore (profits of Rs 21 crore).

Cadila had signed an agreement with Abbott to licence 24 branded generics in 15 key emerging markets in the June-2010 quarter. In the coming year, Cadila's out-licensing deal with Abbott Laboratories will begin adding to the topline.

All-rounded growth

In the just-ended December quarter, Cadila registered revenues of Rs 1,170 on a consolidated basis, delivering 18 per cent growth over the corresponding quarter last year. Operating profit margins expanded by about 80 basis points to 22 per cent. Lower interest costs, marginally higher income and flat depreciation helped net profit, at Rs 162 crore, register a 25 per cent growth.

In terms of segment-based performance, the domestic formulations registered a 17 per cent growth, driven largely by strong growth in chronic segments such as CVS and respiratory and new products.

The US business grew by over 33 per cent, led by good demand for existing products and launch of four products, including two day-one launches. Brazil and Japan formulations were up 33 per cent and 22 per cent respectively, while that of Europe were down 15 per cent (on a high base).

Its presence in the consumer space, through its subsidiary, Zydus Wellness (72 per cent), which owns the brands Sugar Free, Nutralite and Everyuth, though not very significant now (about 8 per cent of revenues), holds significant growth potential. The segment posted a healthy 18 per cent growth during the quarter.

Among other major developments during the quarter were the filing of three new drug applications and DMFs each in the US. Cadila also filed four dossiers in the European market, taking its total count to 102.