Cadila Healthcare - Strong Prescription

The Indian pharmaceutical industry, which is the 14th largest in terms of value and the third largest in terms of volume, is emerging as a world leader in the global arena. It is also a sector that is considered among the safer bets to park your funds during turbulent times. The BSE Healthcare Index has gone up by 34 per cent as against a return of 17 per cent for the Sensex in 2010. If we talk about Cadila Healthcare (CHL), we find that investors have fancied the counter and the stock is up by 95 per cent for the year 2010. In the last ten years since April 2000, the company’s net profit has witnessed a consistent growth while its share price has appreciated by 18 times.

In our analysis of this company, we find that it has set a target to reach a topline of USD 1 billion by FY11 and is well on track to achieve that landmark. An ambitious management wants to touch USD 3 billion by FY16 and turn into a full-fledged research and development company by 2020, rolling out newer molecules from their own facility. The company already has a strong research and manufacturing base which has helped it capture a size-able share of the market, both within India and globally. It derives as much as 48 per cent of its revenues (about Rs 1,742 crore) through the exports of both drug formulations and APIs, with significant operations in the US, Europe, Japan, Latin America, Asia-Pacific regions, and Africa.

The export revenues have grown at a CAGR of nearly 54 per cent over the past five years from Rs 197.6 crore in FY06 to Rs 1,742 crore in FY10. Of this, about 29 per cent comes from generic medicine sales in western countries, obtained through its subsidiaries in the US, France, Spain, and Japan. In the US, CHL is placed among the top 20 companies, mainly because 14 of its 35 products in that market enjoy a market share of over 20 per cent and 8-10 new products are added each year to its portfolio. Likewise, the company has captured a 2.65 per cent share of the generic market in France with the help of over 90 medicines. This is significant because once the patent protection of a drug expires, any company in the world is allowed to produce and sell it, and the first company to actually do so invariably garners a sizeable share of the market.

Its entry in Spain and Japan is relatively recent but it has already made significant inroads into these countries. It entered these markets through the acquisition of Laboratorios Combix in Spain and Nippon Universal Pharmaceutical in Japan. Within two years of its debut in Japan, CHL has notched up sales of Rs 31.6 crore in FY10. This is despite the fact that generics came into the market in Japan only in 2006 after the government changed its rules and allowed them. An important milestone in this regard was CHL’s recent agreement with Abbott Inc, according to which Abbott will license 24 branded generics of 15 key emerging markets to CHL. These are markets where Abbott has a strong and growing presence. The agreement also includes an option for an additional 40 products to be included over the term of the collaboration.[PAGE BREAK]

This means that Abbott will have these drugs manufactured at CHL’s internationally approved production plants and sell them in the emerging markets under the Abbott brand. The products will be manufactured by CHL for Abbott at its state-of-the-art manufacturing facilities in India. While the deal allows CHL to leverage its robust regulatory pipeline, innovative developmental capabilities, and manufacturing strengths, it strengthens Abbott’s global position, enabling it to further accelerate its emerging markets growth. The financial impact of this arrangement – which we believe will be positive – has not yet been announced.

CHL’s 50 per cent joint venture with Hospira, that commenced its operations in FY10 by supplying three products to Hospira for Europe, reported a surprising net profit margin of 57.1 per cent (i.e. profit of Rs 20.9 crore upon sales of Rs 36.6 crore) in Q3FY11 and 43.7 per cent (i.e. profit of Rs 35.8 crore upon sales of Rs 81.8 crore) in 9MFY11. This was primarily due to the first-mover advantage that CHL enjoyed. Going ahead, it is expected that the JV will ramp up as it starts supply to the US and the Canadian markets from Q4FY11 onwards, and also introduces two more products subsequently. In fact, the ramp-up in the Hospira JV would completely  outweigh the negative growth in the financial performance of the Nycomed JV (which would face patent challenge for Pantoprazole Q4FY11 onwards).

CHL launched two products as Day-1 launches during the quarter in Japan, including Glimepride and Ramiprazole. With this the company launched its first in-house developed product for the Japanese market. Otherwise it had so far launched 24 in-licensed products in Japan. The launch of more products from in-house development would result in volume and value growth for the Japanese operation. CHL has also received 15 product approvals for the Spanish market which, coupled with the steadily growing French market (with its recent pro-generic initiatives), would drive the growth engine for its European operations. In order to capture the future growth opportunity in vaccines, CHL expects to invest around Rs 200 crore over the next two years.

CHL’s domestic formulation business continues to maintain its growth, outpacing the industry. Its sales of Rs 420 crore were up by 17 per cent YoY in Q3FY11 due to the launches of line extensions and new molecules. The management is of the view that the domestic business is likely to witness growth of 15–20 per cent in the coming couple of years. The company has launched overall nine products in the domestic market. The launch of its molecule Ostigard 100, which is a first-of-its kind launch in India, is another big positive for the company.

CHL’s branded business has achieved a 17 per cent YoY growth while its generic business gained a 14 per cent expansion in Q3FY11. According to the management, the company will consolidate its position in the highly competitive domestic space going forward. CHL was the fifth-largest player in the domestic space in 2010 as against the 17th in 1995 with a market share of more than 3.70 per cent. The company has a capex plan of Rs 375 crore for FY12. Biologics, transdermals, vaccines, and oncology ointments are areas which the company is keenly looking at to be the next growth drivers.

On the financial front, for 9MFY11 the company has posted a topline of Rs 3,417 crore as against Rs 2,840 crore, witnessing a growth of 20 per cent on a YoY basis. The bottomline for 9MFY11 stood at Rs 532 crore as against Rs 386 crore, witnessing a growth of 37 per cent on a YoY basis. At the current price the stock trades at a P/E of 23.64 times on its trailing 12-month earnings. Its debt-to-equity ratio stands at 0.81 times and the EV/EBITDA is at 21.81 times. The ramp-up in the operations of the Hospira JV along with its growth in the domestic operations and the emerging markets is likely to guide the company’s performance going forward. We feel that the stock will surely add value to your portfolio and you can look to gain 10–15 per cent from the present levels.