 "Cadila Healthcare: US FDA resolution key for re-rating")
The Cadila Healthcare stock is down 16% over the past month on negative news – the drug price-fixing probe, US FDA caution to its R&D arm, drug recall in the US and the regulatory overhang on its Moraiya plant. Although Cadila on Wednesday announced it had acquired six brands from American drug major MSD (Merck Sharpe Dohme), the acquisition is small as these brands clocked sales of only Rs 84 crore in 2015. Given the issues cited above, there are concerns about the company’s outlook.
The firm is underperforming the broader Indian pharma market. It reported a nine% growth over a year in the September quarter, lowest among peers, as its domestic formulation sales continue to lag. Sales growth over the past 12 months at 10.2% is also lower than the 11% growth posted by the sector.
Its top three drugs, which have annual sales between Rs 112 crore and Rs 185 crore, have seen revenues decline by up to 11.5%. Further, smaller brands account for 45% of revenues and sales growth in that category over the past 12 months has been only 5.4%, leading to the underperformance. While volumes helped the pharma market grow, Cadila’s sales have been due to new product launches.
What has been an overhang is also the fact that the company’s drug discovery arm was cautioned by the US FDA over a promotional video misbranding ad for a drug used in treating diabetes and cholesterol. Cadila, however, clarified that it was not a warning letter and the drug is not marketed in the US and is sold only in India. The company is taking necessary steps to respond to this letter.
How sales pan out in the US market will be key. Sales in the US have declined in the recent months on a year-on-year basis. Sales since August have increased, largely due to the contribution of authorised generics of Ascal HD, used in the treatment of ulcerative colitis.
As much as 21% of its US sales come from this drug. Analysts at Jefferies say there is continuing pricing pressure across the generic industries with price erosion of 5-15% and this is expected to sustain in 2017.
This will impact sales and margins of companies including that of Cadila. Further, the company recalled 16,000 bottles of anti-depression drug bupropion hydrochloride from the US market given that they failed to meet the desired dissolution specifications. The drug had a monthly sales of $2 million.
The key trigger, thus, remains the long-pending resolution of FDA issues at its Moraiya plant given that Cadila has filed some limited competition products from this plant. The US is a key market for Cadila given that it accounts for 42% of its revenues.
Analysts at JM Financial say: “Unlike its peers like Alembic, Torrent and Cipla, which have a robust and fast-growing domestic business. Cadila’s growth driver is primarily the US, which makes Moraiya resolution all the more critical. The facility accounts for 30% of its new product filings.
At the current price, the stock is trading at 22 times its FY17 estimates, and investors are better off awaiting clarity on the Moraiya plant and a favourable pricing point rather than now despite the correction.
