CADILA HEALTHCARE Positives on Horizon

Transcription

1 VISIT NOTE CADILA HEALTHCARE Positives on Horizon India Equity Research Pharmaceuticals Post our interaction with Mr. Pankaj Patel, CMD, Cadila Healthcare, we highlight our takeaways on business. We upgrade our earnings by 6-7% in FY13-14E led by upside from domestic business, lower-than-expected drop in profit in Hospira JV and margin expansion through cost optimization. Upgrade to BUY. FDA resolution in the near term will be a key positive, while drug policy implementation could be a negative. Domestic formulations back on track Management is confident of outpacing industry growth in domestic market, ex- Biochem, by addressing therapy gap areas, excelling in sales force management and improving productivity. Revival in 2HFY12 (up 21% YoY) is indicative of higher growth momentum. Further, management is confident of deriving positive synergy by improving scale in recently acquired Biochem business. USFDA resolution in sight USFDA has concluded inspection at Cadila s Moriya facility. While management awaits comments from FDA before giving conclusive stand on resolution, it is confident of the efforts to resolve the issue. Post resolution, there could be 6-8 approvals anticipated, which along with saving on legal and consulting fees, could yield higher margins. Lower price erosion in Docetaxcel, a positive Despite incremental competition in Docetaxel, the extent of price erosion is lower than our estimates. Management has indicated that it has not witnessed any slowdown in the JV s revenue and profitability from Q4FY12 level. Though margins in Docetaxal may not remain at the current level in future, new product launches from JV in the US could partly compensate for profitability loss. Outlook and valuations: Positives on horizon; Upgrade to BUY We believe that growth concerns in the US and domestic market are behind. Moreover, the company s focus on optimizing cost should expand margins by bps in next 2-3 years. We are confident on execution capability of management and vision to invest in higher growth areas. Upgrade to BUY with TP of INR840 (18x FY14E). Financials Year to March FY11 FY12 FY13E FY14E Revenues (INR mn) 45,808 52,119 63,740 74,525 Rev growth (%) EBITDA (INR mn) 10,278 10,816 12,849 15,494 Adj. Diluted EPS (INR) EPS growth (%) P/E (x) EV/EBITDA (x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector BUY Risk Rating Relative to Sector Low Sector Relative to Market Edelweiss Securities Limited Outperformer Equalweight MARKET DATA (R: CADI.BO, B: CDH IN) CMP : INR 721 Target Price : INR week range (INR) : 985 / 620 Share in issue (mn) : M cap (INR bn/usd mn) : 148 / 2,636 Avg. Daily Vol.BSE/NSE( 000) : SHARE HOLDING PATTERN (%) FIIs 4.1% MFs, FIs & Banks 12.7% * Promoters pledged shares (% of share in issue) PRICE PERFORMANCE (%) Stock Nifty : NIL EW Pharma Index 1 month (5.6) months 3.2 (5.2) months (21.5) (7.9) 20.0 Manoj Garg manoj.garg@edelcap.com Perin Ali perin.ali@edelcap.com June 20, 2012 Others 8.5% Promoters* 74.8%

2 Pharmaceuticals Chart 1: Domestic growth has started to turnaround Domestic formulations back on track; cost synergy to drive value in Biochem Post a rough patch in H1FY12 in domestic market due to spillover impact of health billion achieved in FY11, growth in domestic market has bounced back in H2FY12 with 21% growth (ex Biochem) despite higher base in Q4FY11. Management is confident of maintaining this momentum by outpacing industry growth by couple of percentage points (ex-biochem). Growth in the domestic market would be primarily driven by: a) Addressing of therapy gap areas through new launches; b) sales force excellence; and c) productivity improvement. 3.9 Market share 25.0 Relative performance to Industry (%) (%) May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Company growth Industry growth Source: AIOCD AWACS, Edelweiss research Further, management is confident of deriving positive synergy by improving scale in the recently acquired Biochem business, which is likely to contribute INR200mn savings at the operating level, raising margins from 11% currently to 18-19% (Biochem acquisition adds INR2.6bn anti-infectives franchise and has operating margins of 11%, lower than average margins of Cadila). Moreover, management is confident of being able to grow Biochem business at a faster pace on account of better product availability and deeper penetration. View on proposed Pharma pricing policy Cadila management was confident of Market based pricing mechanism on the proposed pharma pricing policy, which is currently promulgated by the EGOM. Based on EGOM proceedings and industry representation, management is further confident that the cost based pricing formula for 74 drugs under current DPCO list will also go away and one pricing formula will be applicable for all drugs under price control, which is a positive. 2 Edelweiss Securities Limited

3 Maintain INR5bn guidance of Zydus Wellness Cadila Healthcare Management expects growth to recover in the consumer healthcare business, led by higher advertising and other promotional spend in Ever Youth segment and focus on Mom and PoP Kirana stores. Key focus in the near term will be on growth revival, but margins improvement is likely to be back-ended due to increased promotional spend. Moreover, there has also been a leadership change where in an ex-j&j expat has been roped in to look at expanding the wellness business. Management is confident on getting business on track and meeting INR5bn target sales by FY14 from INR3.4bn in FY12 (16% CAGR). FDA resolution to enable monetization of key opportunities US is a strategic market for Cadila where it has ramped up investments over the past few years, including inorganic opportunities (Nesher Pharma). Despite being a late entrant and with plain vanilla generic portfolio, Cadila has been able to build USD260mn franchise in a short span of time. Cadila s recent filings focus on niche or limited competition products, encompassing USD180bn innovator market, will support the next leg of growth. Despite no new approvals in FY12, Cadila US business grew 29% (18% organic growth), driven by USD20mn contribution from Nesher and better currency realizations. Moreover, the company has also witnessed increased prescription in two of its key products, Metformin and Tramedol. However, going forward, we believe that new launches will be imperative to sustain growth in the US market. USFDA has concluded inspection at Cadila s Moriya facility in Feb 2012 and has raised some minor observations, which the company has already responded to. While management awaits comments from FDA before giving a conclusive stand on resolution, it is confident of the efforts to resolve the issue. Final comments from FDA are expected in next couple of weeks. Post resolution, there could be 6-8 approvals (oral dosages) anticipated. Though delayed resolution remains a concern, there are a few interesting opportunities, which Cadila can monetize over the next 2-3 years including transdermal patches and nasal spray products. Some of these opportunities are Prevacid ODT (USD330mn; only ANDA filer apart from Teva), Metoprolol XL (USD500mn; limited competition product), Lialda (USD376mn; only generic filer), Asacol HD (USD167mn; limited competition) and Astalin nasal spray. We expect its US business to post 25% CAGR over FY12-14E. Nasal spray & transdermal to drive mid-term growth and biosimilars long term Cadila s mid-to-long-term strategy is largely focused on niche and limited competition products, including transdermal patches, nasal spray, oncology, vaccines and biosimilars. These filings consist of differentiated and difficult-to-formulate products with a total addressable market opportunity of over USD180bn. The company has made significant investments in these areas, including manufacturing set-up. Management believes that transdermals, injectables and nasal spray products will be key growth drivers in the interim period (FY13-15), while vaccines and biosimilars will drive long-term growth. We highlight that company has filed 2 trandermals, 18 injectables and 5 nasal spray products. 3 Edelweiss Securities Limited

4 Pharmaceuticals Fig.1. Focus on Niche or complex therapies to drive strong growth trajectory in US over medium and long term Potential pipleline: 80+ pending approvals 22 approved but not launched Sales: USD 1bn Sales: USD 260 mn Product marketed: 45 Vanila generics Market Size: USD70bn Growth Drivers 8 Injectibles 5 Nasal Products USD50bn Topicals 2 Transdermal Patches and others in pipeline (USD20bn) Growth Drivers Vaccines (USD22bn) Biogenerics (USD40bn) NCE launches 0 Current business Medium term Long term FY2012 FY2016 Positive surprise from lower price erosion in Docetaxel Source: Company, Edelweiss research Despite incremental competition in Docetaxel, the extent of price erosion is lower than our estimates. Management has indicated that it has not witnessed any slowdown in JV s revenue and profitability because of Docetaxel. Though, going forward, margins in Docetaxel may not remain at the same level, new product launches in the US could partly compensate for profitability loss at Docetaxel. Overall, Hospira JV has contributed USD 41.5mn to bottom-line in FY12, which we believe will come down to USD30mn (earlier estimate of USD22mn) in FY13E. Lower-than-expected profit erosion in Hospira JV will lead to earnings upgrade, in our estimates. Cost optimization through Prism II Cadila has initiated project Prism II to improve efficiency across the company and optimize costs. A similar project carried out in FY08 had enabled it to improve margins by bps. Management is aiming to save ~INR bn through this initiative over the next 2-3 years. This will expand operating margins by bps over the next 2-3 years. Outlook and valuations: Positives on horizon; maintain HOLD We believe that growth concerns in the US and domestic market is over and recovery is in sight. Moreover, the company s focus on optimizing cost through Prism II is likely to expand margins by bps over the next 2-3 years. We are confident on execution capability of the management and vision to invest in higher growth areas (biologics, injectibles, transdermal and nasal). We raise our earnings estimate by 6% and 7% for FY13 and FY14, respectively, and upgrade to BUY with TP of INR 840 (18x FY14E). 4 Edelweiss Securities Limited

5 Company Description Cadila Healthcare CDH, founded in 1952 and headed by second generation entrepreneur Pankaj R Patel, is the sixth largest company in Indian pharma market with 3.9% market share. The domestic franchise, with widespread field force (4,500) and pan-india presence constitute 35-40% of total sales. The chronic segment accounts for 26% of total domestic business with largest contribution from cardio vascular therapy (CVS), where CDH has leading market share (6.1%) after Sun Pharma and Ranbaxy. Apart from prescription products, CDH has built a formidable presence in nutraceuticals through its listed entity Zydus Wellness (owns 72% of total share holding). CDH has successfully build its international operations, with presence in branded generics emerging markets of Brazil, Asia-Pac and Africa and plain generics regulated markets of US, EU and Japan, which together account for 39% of CDH s total business. Moreover, management s strategic focus on building strong partnerships in the US through Hospira and Nycomed JVs has been significantly accretive to business over the past five years. Investment Theme We expect CDH s sales to post 20% CAGR to INR74bn by FY14E, led by 20% CAGR in domestic branded formulation and 25% CAGR in US formulations business. We believe that CDH is readying itself for the next leg of growth by investing in future technology and pipeline. Moreover, the cost optimization initiative along with niche opportunities should lead to margin expansion. Overall, we expect net profit to post 21% CAGR over FY12-14E to INR 9.9bn in FY14E. Key Risks Higher growth in domestic formulations could add positive upside We highlight that incremental upsides from higher field force productivity and profitable product pipeline (from Bayer JV) could be an upside risk to the overall company s growth and earnings estimates. We have build 13.7% growth in domestic business over FY13-15E Regulatory risks Regulatory issues including product approval delays, unfavorable litigation outcomes, and potential future adverse inspections from USFDA are structural negatives for CDH. Currency appreciation could hit profitability CDH s international markets constitute 54% of total sales. Hence, volatility in currency (INR USD and INR EUR) could hit its profitability. 5 Edelweiss Securities Limited

6 Pharmaceuticals Financial Statements Income statement (INR mn) Net revenue 35,823 44,647 50,899 62,866 73,651 Other operating Income 839 1,161 1, Income from operations 36,662 45,808 52,119 63,740 74,525 Materials costs 11,784 14,754 16,794 21,355 24,894 Employee costs 3,930 4,169 7,512 6,487 7,618 R&D cost 1,660 2,502 3,638 3,538 4,155 Total SG&A expenses 8,846 11,081 9,966 15,465 17,750 Other expenses 2,562 3,024 3,394 4,045 4,615 Total operating expenses 28,782 35,530 41,304 50,891 59,031 EBITDA 7,880 10,278 10,816 12,849 15,494 Depreciation & Amortization 1,339 1,269 1,579 1,808 2,036 EBIT 6,541 9,009 9,237 11,041 13,458 Other income Interest expenses ,069 1,354 1,249 Profit before tax 5,878 8,441 8,699 10,221 12,691 Provision for tax 741 1,064 1,130 2,044 2,728 Core profit 5,137 7,377 7,568 8,176 9,962 Extraordinary income/ (loss) 243 (12) (757) - - Profit after tax 5,380 7,365 6,811 8,176 9,962 Minority interest Profit after minority interest 4,890 7,124 7,176 7,833 9,544 Diluted equity shares (mn) Diluted EPS (INR) CEPS (INR) Dividend per share (INR) Dividend payout (%) Common size metrics - as % of net revenues Operating expenses Materials costs Employee expenses SG&A expenses R & D cost Depreciation Interest expenditure EBITDA margins Net profit margins Growth ratios (%) Revenues EBITDA PBT Net profit EPS Edelweiss Securities Limited

7 Cadila Healthcare Balance sheet (INR mn) As on 31st March FY10 FY11 FY12E FY13E FY14E Equity capital 682 1,024 1,024 1,024 1,024 Reserves & surplus 15,603 20,691 25,926 31,456 39,203 Shareholders funds 16,285 21,715 26,949 32,480 40,227 Minority interest (BS) ,248 1,666 Borrowings 10,905 10,973 20,094 18,594 17,594 Deferred tax liability 1,141 1,127 1,185 1,185 1,185 Sources of funds 28,723 34,484 49,133 53,507 60,672 Gross block 25,578 28,320 33,320 39,320 45,820 Depreciation 8,734 9,994 11,573 13,381 15,417 Net block 12,271 13,753 21,747 25,939 30,403 Capital work in progress 2,482 4,310 1,691 1,691 1,691 Intangible assets 4,573 4,573 9,880 9,880 9,880 Investments ,873 5,737 5,737 Inventories 7,504 8,119 10,905 12,040 14,139 Sundry debtors 4,668 7,652 8,863 10,811 12,696 Cash and equivalents 2,507 2,952 4,666 1,367 2,308 Loans and advances 3,070 4,106 3,167 4,128 4,848 Total current assets 17,749 22,829 27,601 28,347 33,990 Sundry creditors and others 6,146 8,306 5,455 6,779 7,961 Others current liabilities ,924 8,605 10,105 Provisions 1,951 2,233 2,281 2,704 2,964 Total current liabilities & provisions 8,661 11,188 14,660 18,088 21,030 Net current assets 9,088 11,641 12,941 10,259 12,961 Miscellaneous expenditure Uses of funds 28,723 34,484 49,133 53,507 60,672 Book value per share (INR) Free cash flow (INR mn) Net profit 4,890 7,124 7,176 7,833 9,544 Depreciation 1,339 1,269 1,579 1,808 2,036 Others (365) Gross cash flow 6,536 8,620 8,390 9,985 11,998 Less: Changes in WC 403 2,108 (414) 617 1,761 Operating cash flow 6,133 6,512 8,804 9,368 10,237 Less: Capex 3,477 4,579 6,954 6,000 6,500 Free cash flow 2,656 1,933 1,850 3,368 3,737 Cash flow metrics Operating cash flow 6,133 6,512 8,804 9,368 10,237 Investing cash flow (3,435) (4,579) (14,927) (8,864) (6,500) Financing cash flow (2,968) (1,616) 7,830 (3,802) (2,797) Net cash flow (270) 317 1,707 (3,299) 940 Capex (3,477) (4,579) (6,954) (6,000) (6,500) Dividends paid (1,237) (1,529) (1,797) (1,797) (1,797) 7 Edelweiss Securities Limited

8 Pharmaceuticals Profitability & efficiency ratios ROAE (%) ROACE (%) Inventory day Debtors days Payable days Cash conversion cycle (days) Current ratio Debt/EBITDA Debt/Equity Adjusted debt/equity Operating ratios Total asset turnover Fixed asset turnover Equity turnover Du pont analysis NP margin (%) Total assets turnover Leverage multiplier ROAE (%) Valuation parameters Diluted EPS (INR) Y-o-Y growth (%) CEPS (INR) Diluted PE (x) Price/BV (x) EV/Sales (x) EV/EBITDA (x) Dividend yield (%) Edelweiss Securities Limited

9 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Apollo Hospitals Enterprise HOLD None None Aurobindo Pharma HOLD SU H Cadila Healthcare HOLD SP L Cipla HOLD SP L Dr.Reddys Laboratories HOLD SP M Glenmark Pharmaceuticals BUY SO H Lupin BUY SO M Ranbaxy Laboratories REDUCE SU H Sun Pharmaceuticals Industries HOLD SO L Torrent Pharmaceuticals BUY SO H ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 9 Edelweiss Securities Limited

10 Pharmaceuticals Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Vikas Khemani Head Institutional Equities Nischal Maheshwari Co-Head Institutional Equities & Head Research Nirav Sheth Head Sales Coverage group(s) of stocks by primary analyst(s): Pharmaceuticals Apollo Hospitals Enterprise, Aurobindo Pharma, Cadila Healthcare, Cipla, Dr.Reddys Laboratories, Glenmark Pharmaceuticals, Lupin, Ranbaxy Laboratories, Sun Pharmaceuticals Industries, Torrent Pharmaceuticals Recent Research Date Company Title Price (INR) Recos 07-Jun-12 Cipla US court ruled against Cipla; negligible impact; EdelFlash 309 Hold 07-Jun-12 Pharma Earning sensitivity to domestic pricing policy; Sector Update 06-Jun-12 Dr Reddy's Laboratories Collaboration with Merck to develop biosimilars; EdelFlash 1,619 Hold Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1 stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period 10 Edelweiss Securities Limited

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