High base not growth deterrent for Cadila, high launches may drive earning

Cadila Healthcare, unlike many of its peers, seems to be a bright spot in the pharma space. The company, which has been buzzing with news on approvals of drug launches, announced on Wednesday the USFDA’s approval for its Ahmedabad-based SEZ facility. The unit, which manufactures oncology injectables for regulated markets, was inspected from 28 May to June 5 and has not received observations by the drug regulator. 

With this, Cadila, which resolved the FDA warning letter for its Moriaya plant last year, has no regulatory overhang. In fact, the strong product pipeline for the US market and faster pace of approvals after the FDA resolution, bode well for growth. The stock, which has been trending down due to weak sentiment towards the pharma sector, could provide a good opportunity for investors at current valuations, said analysts.

Consider this, Cadila posted a strong 54 per cent year-on-year increase in net profit during the March quarter, led by 67 per cent growth in the US business. This surge in profit was also helped by exclusivity sales of generic, Lailda (ulcerative colitis treatment) and due to March being a seasonally strong quarter for generic Tamiflu (flue treatment). Because of this, there are fears that as the exclusivity sales period has ended, Lailda’s contribution may decline, leading to pressure on US sales. However, analysts differ. 

A key reason for the confidence is Cadila’s 144 pending approvals in the US and 77 approvals received (including eight tentative) in FY18, of which only 20 had been launched. Analysts believe that such a strong pipeline will help support growth in FY19 too. Praful Bohra at Equirus Research says that high-value products like Toprol, the generic of anti-hypertensive, and the launch of Asacol HD, its own generics of anti-inflammatory — can provide triggers. 

Cadila is marketing authorised generics of Asacol HD, which contributes about 20-25 per cent to gross margins, compared to the 70-75 per cent margin it will earn by selling its own generics. Analysts expect an additional Rs 1.4 billion of operating profit for Cadila from the launch of its own generics. Analysts at Elara Capital believe the momentum will continue into FY19, led by high-value niche launches. Given the backdrop, Reliance Securities expects Cadila’s net profit to grow 18.3 per cent annually through FY18-20. 

With stock valuations at a reasonable 17 times one-year forward earnings, there is some cushion on the downside too.