Cadila Healthcare: Strong growth drives prospects

As concern dissipates over FDA action on its Moraiya unit, focus returns to high-growth US business, while domestic business also rebounds

Cadila Healthcare continues moving from strength to strength as concerns over its Gujarat facility dissipate. The stock saw a highs of Rs 1,760 in November and had corrected to a closing low of Rs 1,463 last month. It has since regained, to Rs 1,700 levels.

Analysts at Ambit Capital say America's Food and Drug Administration's observations on Cadila's Moraiya facility primarily pertain to customer feedback on complaints and are not serious.

Strides Arcolab had a similar letter, termed a 'Form 483' (when, in an FDA investigator's judgment, the observed conditions or practices indicate an FDA-regulated product might be in breach of its requirements), issued in August 2014 and the company resolved it with no escalations.

Cadila had got a Form 483 from the FDA in September 2014 and the Street had become nervous on the action that could be taken against the company.

Analysts, however, remain upbeat, as the company continues doing well in the US. According to IMS data, the company's trailing three-month sales in the month of January showed the highest growth (eight%) among Indian peers.

This trend continued in February. Antique Broking's US generic pharma monitor says Dr Reddy's and Cadila continued to gain better share in their key products in February, too, as compared to others.

Notably, the company continues to gain share in its other key products of Wellbutrin XL (anti-depressant), Urocit-K (urinary treatment) and Niaspan (lipid control), beside huge growth in the anti-malarial generics of Plaquenil (a $440 million per annum drug) that had also driven Cadila's performance in the December '14 quarter.

According to a note by analysts at Nomura on IMS data for the week ending March 13, Plaquenil saw its market share increase to 38.7% (up 800 basis points), from around 30% in end-December.

The gains were helped by a decline in Ranbaxy's market share in the product from about 65% at end-September to about 33% now, and after IPCA had voluntarily suspended shipments of the formulation to the US after alerts on its Ratlam unit.

Generics of Urocit-k, a limited competition ($120 million) drug), saw Cadila's market share increase from 20.3% in December to 29.2% for the week ending March 13. The price rise by the company and limited competition in anti-malarials is likely to drive margin growth, too.

In this backdrop, analysts expect Cadila to post strong growth. For instance, those at Ambit Capital estimate a compounded growth of 21.5% in sales and 36% in net profit over FY14-17, implying an operating earnings' margin expansion of 447 basis points in this period, largely led by niche opportunities in the US and Hydrochloroquine (Plaquenil). The approvals anticipated in niche segments in the US are in transdermals, nasal sprays and controlled release products.

Further, analysts are also expecting acceleration of growth in India. Domestic growth has already picked up to high double-digits as the impact of the new drug pricing policy fizzles out.

Some brokerages like Sharekhan have raised their earnings estimates by six% and seven% for FY2016 and FY2017, respectively, in view of better traction in the US generic business, potential from the launch of the hepatitis-C drug in India and product ramp-up in other key markets, including business from joint ventures.

The analysts have also upgraded their target price for the stock to Rs 2,060. Analysts at Ambit have a target price of Rs 2,039, while those at UBS have Rs 2,135.

Analysts polled by Bloomberg this month have a consensus target price for the stock at Rs 1,939, a sixteen% upside from current levels.