Stock Review: Cadila Healthcare

 

   Cadila Healthcare is one of the top gainers of the BSE Healthcare Index. The gains are not surprising as the company has been a consistent out-performer in the pharma sector since the last four quarters.

It is one of the leading integrated pharma companies in India with a presence in formulations, bulk drugs and intermediates, over-thecounter products and international generics. Over 40% of its sales come from generic exports. The company is a strong player at home, too, with the domestic market contributing 50% of its revenues. US, Europe, Japan and emerging markets are its other markets.

BUSINESS

Cadila is among the top 3 players in the US market for nine of the top ten products marketed by it. It has been ranked 12th among the top US generic companies. The company has filed 130 new drug applications with the US FDA of which 65 have been approved. Cadila aims to file about 12-15 new drug applications annually.

The company expanded its domestic business adding new divisions and ramping up the field force to sustain growth till 2015. It expects to grow at over 15% annually excluding the benefit derived from its JV with Bayer. Since the last couple of years, and particularly in FY11, Cadila's growth in Europe has been muted. This was due to some price reductions undertaken last year.

GROWTH DRIVERS

The main growth drivers in the export market would be US, Brazil and the emerging markets. The company is likely to receive a fillip from its recent joint ventures with Bayer and Abbott. It has entered into a joint venture with Bayer Healthcare to market products in India across various therapeutic areas. The objective is to leverage the strengths of Bayer's optimised product portfolio and the marketing and distribution capabilities of Cadila.

The company has also entered into a deal with Abbott Laboratories to license their 24 branded generics in 15 key emerging markets, with an option to add 40 more products. It has recently acquired a unit from Nesher Pharma that will facilitate manufacture of generics of controlled substances in the US market.

FINANCIALS

Cadila's net sales have grown at a compounded annual growth rate of 25% over the last five years. Its net profit has increased by a CAGR of 36% during the same period. The company successfully met its revenue target of $1 billion in FY11. It aims to achieve a turnover of $3 billion by 2015, primarily through the organic route. The company has been witnessing de-growth in the domestic API business since the last two years. The profitability of its Nycomed JV has also reduced. But this has been offset by the profit contribution of its JV with Hospira.

CONCERNS

At 23.3%, the company's operating margins (on a four-quarter trailing basis) seem to have peaked in the quarter ended Dec 2010. There is little scope for margins to improve to record levels in the near term. The European market is also likely to remain challenging for the company. US FDA has issued warning letter to the company's Zyfine division plant in Ahmedabad. While it does not impact the company's revenues in the immediate term, it reflects poorly on the company's manufacturing practices.
Nevertheless, the growth-oriented company looks promising as it ventures into new fields like niche generics in the US, biologics, vaccines, and novel drug discovery etc.