Cadila Healthcare after acquiring domestic player Biochem in December has now got into a strategic partnership for the global markets. It entered into partnership with Microbix Biosystems of Canada for re-commercialising and marketing of Urokinase, a thrombolytic drug that is used for treatment of blocked arteries and veins. This is a good long-term deal for Cadila, which will ensure growth in the US markets. Earlier in June 2011, Cadila had acquired US-based Nesher Pharma that will be fruitful for US growth while in July 2011 it acquired Bremer Pharma Gmbh for expanding animal healthcare portfolio in Germany and other markets.
Meanwhile, the stock has corrected around 34 per cent from 52-week high of Rs 983.50 on 19 July. However, analysts feel that this has been due to weak performance in first two quarters. The single-digit growth in the domestic markets after strong 22 per cent growth in March 2011 quarter has led to the correction. The domestic growth, however, is estimated to come at 10.4 per cent in December quarter as per Motilal Oswal Securities’ result preview. Higher employee costs and other overheads post acquisitions may keep the performance under pressure for next few quarters too, with improvement seen in FY13. Most analysts are bullish, with a one-year consensus target price of Rs 839.70 reflecting 29 per cent upside from current price of Rs 650.
Re-commercialisation plans for Urokinase
Urokinase, an FDA approved drug, was a popular therapy but had to be withdrawn from the markets in 1999 due to GMP issues at Abbott. Cadila wants the drug to be re-launched in strategic partnership with Microbix. Microbix will provide manufacturing infrastructure, raw material and technical skills and Cadila will commercialise the product. Manoj Garg and Perin Ali of Edelweiss Securities in their reports observe that the drug has market potential estimated at $400 million by 2020 and can also be used for oncology and ophthalmology therapies too.
However, to encash the opportunity Cadila will have to fund the clinical trials first to be conducted by Microbix. Reports indicate that the launch of the drug will be in 2014 and is a good long-term opportunity. However, details on milestone payments, expenses etc are not clear now and hence most analysts await for the same to quantify the impact.
Acquisitions to bear fruits
In December 2011, Cadila had acquired the anti-infective major Biochem. The earlier Nesher Pharma acquisition in the US was of strategic importance considering the expertise of Nesher in niche therapies, which have development or production barriers, such as controlled release medications. Cadila also got an access to a difficult-to-develop product pipeline along with expertise and infrastructure for ensuring growth in the US. Analysts feel that Nesher Pharma is likely to add $30 million to the top line in current year, however over three years the contributions are to reach $100 million annually.
The acquisition of Bremer Pharma in July 2011 on the other hand was directed at expanding its animal health business and gain strategic access to key markets across Asia, Europe, South America and Africa. The global animal health market is valued at $20 billion.
Biochem’s acquisition directed towards the domestic markets helped Cadila gain 6th Rank in the IPM and 9th in the anti-infective segment. Biochem has grown 13.7 per cent CAGR over last three years. However, analysts at Nomura feel that this growth will slow down as Biochem derives 81 per cent revenues from anti-infective segment that is slowing down. Though there is overlap in certain anti-infective products, nevertheless some other Brands of Biochem containing Ampicillin, Cefotaxime, Amikacin, Azithromycin, etc enjoy a huge market share while combination brands as Monotax are enjoying a fast growth. Analysts at HSBC in their reports had observed that acquisition of BioChem will strengthen its domestic portfolio.
Overall outlook
Sarabjit Kaur Nangra VP research at Angel Broking feels that Cadila has always been selective in making acquisitions and alliances and has utilised all opportunities well. Analysts at HSBC, too, share a similar view and observed that past acquisitions (Liva Healthcare in 2007), Brand Aten and German Remedies in 2001) and Recon Healthcare in 2000) have helped Cadila become one of the top five players in India.
Nangra believes that the previous quarter’s results being disappointing has led to the correction in stock prices providing an opportunity to investors for entering the stock. Analysts at HSBC feel that part of reason for slow domestic growth has been reclassification of sales from domestic formulations to the Bayer joint venture (Bayer Zydus Pharma formed in Jan 2011). Following Biochem acquisition they still expect a marginal improvement in domestic growth for next two quarters, given that higher sales will be partly offset by additional overheads (increase in sales force and other expenses). They however expect India formulation to recover in FY13 from a low base and forecast 18 per cent growth.
This period of two quarters post which domestic growth will start complementing global growth is possibly the reason for 47 per cent of the analysts having ‘Hold’ rating on the stock and 42 per cent having a ‘Buy’ rating, as per Bloomberg Data.
