CADILA HEALTHCARE, Market Perform – Investment in Technologies is Resulting in Near Term Pain

Date: 2015-07

“Cadila’s Q3FY13 result was below our estimates. Although revenue grew by 16%, in line with our expectation, EBITDA declined by 2.5% yoy. After adjustments of non recurring items (~`200m of forex gain, `100-110m of user fee paid to USFDA and donations of `60-70m), EBITDA margin deteriorated by 400 bps yoy due to (1) higher R&D spending (8.6% of total sales) (2) pricing pressure in US due to lack of new launches (3) lower margins of Hospira JV due to competition in Docetaxel and (4) lower sales in Brazil due to continued hangover of ANVISA strike. Net Profit declined by 31% yoy due to high tax rate of 36%.
Higher R&D spending towards Transdermals, NCEs and biosimilars (company started global clinical trials for one biosimilar and expected to start clinical studies of one NCE in US next year) and lower JV earnings due to price erosion in Docetaxel will work against margins; however, new product launches in US (20-22 new products in US in year 2013 including 2-3 controlled substance from Nesher as per the management) coupled with recovery in Brazil sales may help EBITDA margins to improve by 100-150 bps in FY14 over FY13.
We continue to believe in the strength of technology intensive product pipeline of Cadila. Management is putting efforts in diversifying company’s product portfolio towards complex generics (Transdermals, Topicals, Biosimilars, Colon Targeted Drugs, NCEs, Nasals), however, these efforts will fructify only in the longer term. Launch of Transdermals (1-2) and Urokinase are expected to be key earning drivers in FY15.
We revise our earnings estimates down by 23% and 7% for FY13 and FY14 and Revise our Target Price down to `815, valuing the company at 20x of FY14 earnings. We reiterate our Market Perform Rating on Cadila Healthcare.”


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