Cadila Healthcare Ltd
Initiating Coverage Cadila Healthcare Ltd.
Recommendation BUY Snapshot CMP ( 13th Sept 2010) Rs. 614 Headquartered in Ahmedabad, Cadila Healthcare Limited (CDH) is research oriented pharmaceutical company. It has presence Sector Pharmaceuticals across the Pharma value chain having operations from API to Stock Details formulations to research & development. Cadila is 5th largest BSE Code 532321 player in the Indian formulations market.
NSE Code CADILAHC Investment Rationale Bloomberg Code CDH IN Robust Export Growth: Export formulations is currently Market Cap (Rs. cr) 12,576 contributing ~40% of sales but expected to grow faster than Free Float (%) 25.2 the company average. We expect it to grow at a CAGR of 29% for next two years and to contribute ~44% to FY12E 52- wk HI/Lo 681/314 revenues. Avg. Volume BSE (Monthly) 33034 Strong Domestic Presence: Cadila is a strong player in Face Value (Rs) 5.0 domestic formulations. Its domestic business till now has Dividend (FY 10) 20% enabled the company to take risks by venturing into new f regions, trying therapeutic segments etc. We rate domestic Shares o/s (Crs) 20.5 segments as a CASH COW for the company having stable Relative Performance 1Mth 3Mth 1Yr market share and steady margins. Cadila -1.5 -1.5 90.1 Niche Area Approach: Company is making foray into niche Sensex 4.0 11.1 16.2 segments which have high growth potential like Transdermal, Pulmonary, Topical etc together having market 225 opportunity of $180 bn in near to mid-term. 200 175 Consumer Healthcare: Cadila has strong brands like 150 EverYuth, SugarFree, Nutralite under its separated listed 125 subsidiary – Zydus Wellness. 100 Strategic Partnership In Form Of JVs: Cadila has done some 75 JVs with renowned players like Hospira, Nycomed, Bharat 50 Serum. It provides revenues visibility and learning form 9‐Sep 9‐Dec 9‐Mar 9‐Jun 9‐Sep experience of such players which reduces risk for the Cadila Sensex company. Together they are contributing ~5% to revenues.
Shareholding Pattern as of 30 June 2010 Valuation & Recommendation We believe that the company has done the groundwork and has Promoters Holding 74.8% made investments in right direction like acquisitions done to Institutional (Incl. FII) 17.6% enter new regions and business segments and now it is the right Corporate Bodies 1.1% time to enjoy the fruits of all those efforts. We believe that Public & others 6.5% Cadila should be valued on a PE multiple of 20x. Based on our EPS of Rs. 39.5 for FY12E and a target multiple of 20x we arrive Runjhun Jain Nagraj – Research Analyst at target of Rs. 790. Consequently, we initiate with a BUY rating (+91 22 3027-1525) on the stock with a target price of Rs. 790, indicating a potential [email protected] upside of 28.7%.
Particulars Net Sales Growth EBITDA EBIDTA PAT PAT Adj EPS P/E P/BV
(Rs Cr) (%) (Rs Cr) (Margins %) (Rs Cr) (Margins %) (Rs) (x) (x)
FY09 2,927 26.0 606 20.7 303 10.4 14.8 41.5 10.2
FY10 3,687 25.9 809 21.9 505 13.7 24.7 24.9 7.7
FY11E 4,487 21.7 996 22.2 633 14.1 30.9 19.9 6.0 FY12E 5,368 19.6 1,224 22.8 809 15.1 39.5 15.5 4.6
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Initiating Coverage Cadila Healthcare Ltd.
Table of Contents Page No Investment Rationale 4-5 Robust Export Growth 4 Strong Domestic Presence 4 Targeting Niche & High Growth Segments 5 Consumer Healthcare Segment 5 Strategic Partnerships In Forms of JVs 5 Organic Growth Supplemented By Inorganic Expansion 5
Company Background 6
Business Overview 6-16 Finished Dosages 7-11 o Domestic 7 o Exports 8-11 API 11 Consumer Healthcare 11-13 Animal Healthcare 13 Unique Model: JVs 13 Research and Development 14-16
Quarterly Result Analysis 16
Peer Comparison 17
Risks and Concerns 17
Valuation and Recommendation 18 PE Chart
Financials 19
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Initiating Coverage Cadila Healthcare Ltd.
INVESTMENT RATIONALE
Robust Export growth : From US to Taiwan Currently Cadila is getting ~40% of revenues from formulations exports. It caters both to regulated as well as semi regulated markets. We see the next phase of growth coming from exports markets for the company. It entered the US market 5 years ago and in the short span of 5 years of US operations the company has been able to grow its US sales at CAGR of 91% from FY06 to FY10 and currently contributes 19% of gross revenues. We expect it to Exports to drive contribute to ~24% of revenues by FY12 growing at a healthy CAGR of 35% on back of strong growth in future… product pipeline. The company plans to launch 12-15 ANDAs annually. Cadila is also making foray in high value generics like pulmonary, transdermal, oncology, hormones, and topical products which is $180 bn plus opportunity in near to mid-term period. Given the complex nature of products entry barriers is high ensuring margin stability.
Cadila is not looking tender based markets like Germany and mainly focus on prescription markets like France and Spain in Europe. It has adopted inorganic route to enter these markets by acquiring Alpharma in France and Laboratorios in Spain. We expect France region sales to grow at CAGR of 22.5% for next two years. We also expect profitability to improve in both of these markets as the company is transferring manufacturing of more and more products to India thus reducing the cost base.
The company has also forayed into Japan markets which has been the most difficult to market for any company to crack. Cadila adopted the most logical way to enter Japanese markets i.e. by way of acquisition. Cadila has acquired a company called Nippon in FY07 and although it has not yet able to garner any significant share from Japanese markets we see huge growth potential in future. Given the increased thrust of the Japanese government on generics in order to reduce the cost of healthcare and head start benefit of Cadila in the market we are confident that the company would be able to grow rapidly in the region.
Semi regulated markets like Brazil and RoW are shaping up decently for the company. Together they contributed around 9.5% to gross revenues in FY10. Brazil markets are branded generics market just like India providing stability to margins. We expect these markets to grow @20% for next two years. The company has successfully forayed into Taiwan last year and with that has become the first Indian company to start operation in highly regulated but promising markets. It has plans to enter Thailand son which is looking attractive given the branded generics characteristics and low competition of the markets.
Strong domestic presence: CASH COW th Domestic market Cadila is the 5 largest player in domestic markets with 3.7% market share. It is a leader in would sponsor the cardiovascular, gastro intestinal, women’s healthcare, and respiratory segments in the expansion program covered market. It derives 57% of revenues from chronic therapy segments giving higher in export regions… revenue visibility to the company. Domestic formulations contributed 40% to gross revenues in FY10 with 95% coming from branded formulations portfolio. It is one of the earliest players to target rural markets. It has an impressive field force of 4,500 people divided among 11 divisions to target wide range of doctors and to penetrate deeper into the country. It is having a run-rate of around 60 launches (including line extensions) in the domestic market thus maintaining the growth momentum. The company is also targeting new therapeutic segments to increase the scale and scope of its operations in India. Stable domestic formulations give a freedom to the company to foray new region and new avenues of growth thus acting as a “CASH COW” for the company. We believe the company would be able to match industry growth and expect it to report Rs 1,808 cr of domestic formulations revenues in FY12E, a CAGR of 11.8%.
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Initiating Coverage Cadila Healthcare Ltd.
Targeting niche and high growth segments Indian vaccines maker is expected to be Rs 3,000 cr in size which provides huge potential to grow for the participants. Cadila is emerging as a serious player in the segment with rabies and H1N1 vaccines in its account. Cadila healthcare is targeting new niche segments to grow to the next phase. Vaccine segment gets higher valuation as it is a complex product which posts high barrier for entry and needs specialized skills to get success. We believe that Cadila has been able to crack the code and now poised for high growth. It is the first Indian company to launch H1N1 vaccine which shows the strong capability of its research and manufacturing skills.
The company is also entering other “difficult to enter” segments like Pulmonary (brand sales of $20bn), Transdermal ($10bn), Biogenerics ($40bn), Topical ($16bn) etc. These are near to mid term growth drivers of the company as these are high value low competition products.
Consumer healthcare segment: Another feather in the hat Consumer healthcare and wellness business contributed 7.4% of gross revenues in FY10. The company functions under three segments namely “Sugar substitutes,” “Skin-care,” and “Margarine” which is listed separately under a 72% subsidiary called “Zydus Wellness.” It is growing @ CAGR of 34% since last 4 years. It is a market leader in Peel off segment with 98% market share and in Scrubs with 75% market share under “Skin care segment.” Also largest player in “Margarine” segment. It has recently launched “Menz” under “Skin care segment” for men. We expect it to grow @ 25% for next two years and to contribute 8% plus to gross revenues. The segment enjoys higher than average company margins at NPM of 17% which has increased from last year. We believe the company still has room for potential to increase its consumer business margins further.
Unique Model Strategic Partnerships in form of JVs of Cadila healthcare has adopted a unique business model of involving customers directly in partnership… to the business by forming JV with them. It has done it with Hospira, Nycomed and recently Provides with Bharat Serum and Vaccines. This provides many benefits to the company like sales stability and higher stability and visibility, technological transfer from market leaders, access to the markets visibility to where it is not present to name a few. We are positive on the future of these JVs and revenues expect company to do such more deals in future.
Organic growth complemented by a string of successful acquisitions The company has started acquiring brands, companies since last 4-5 years to fasten the pace of its growth which has worked well also for the company. It has done strategic acquisitions to fill the gaps in markets, business segments or product wise. This strategy has shortened the learning curve of the company and gave it a competitive advantage in the targeted fields. We believe the management has proved its mettle by managing well all the acquisitions done till now and have grown them many fold. We believe that Cadila one among few companies who has able to turn around its acquired targets and could get the maximum benefit from them. This shows the superior leadership capabilities of the management.
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Initiating Coverage Cadila Healthcare Ltd.
COMPANY BACKGROUND Zydus Cadila is a global healthcare provider and one of the top five pharma companies in India. The company was founded by Late Mr. Ramanbhai B. Patel in 1952 and went on to become the second largest pharma company in the early 1990’s.
In 1995, the group restructured its operations and now it operates as Cadila Healthcare Ltd., under the aegis of the Zydus group spearheaded by Mr. Pankaj R. Patel, Chairman and Managing Director. The group has a strong presence in the cardiovascular, gastrointestinal, women’s healthcare segments, respiratory, pain management, CNS, anti- infectives, oncology, neurosciences, dermatology and nephrology segments with field force of 4,500 reaching out to super specialists, specialists, surgeons, physicians, and the rural markets. It has 11,000 dedicated work-force spread across the world.
The company has a well integrated business model having presence from API to R&D. It’s one among the very few companies to have presence in Top three markets – US, Japan and Europe. It also has presence in Emerging markets which are high growing regions. Cadila is also a strong player in domestic markets with its strong legacy. Cadila believes in quality and hence gives more thrust on R&D for its future expansion hence invests close to 5-6% of revenues annually in R&D.
Cadila caters to consumer market also via its listed subsidiary - Zydus Wellness, in which it holds 72% share. Zydus wellness is the market leader in the segments present which was possible only due to its niche segment approach.
BUSINESS OVERVIEW CDH is a mid-sized company but with its unique model and positioning it enjoys the goodwill similar to large caps. Cadila caters to both domestic as well as exports markets with its wide range of products. It is a well established player in domestic region enjoying 3.7% market share. It is a late entrant in regulated markets like US and Europe but with its focus and niche product approach has achieved an impressive growth. Cadila healthcare is a research based integrated company supplying from APIs to Formulations. It has a consumer products division under the separately listed company – Zydus Wellness. It also has a small business of animal health.
Cadila
Domestic Exports JVs Others (41%) (44%) (4%) (11%)
Formulat Formulat Consume Animal API API Hospira Nycomed ions ions BSV r Health (1%) (7%) (2%) (2%) (40%) (37%) (8%) (3%)
Source: Company, NB Research; Sales FY10
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Initiating Coverage Cadila Healthcare Ltd.
FINISHED DOSAGES Domestic Formulations: Cadila Healthcare (CDH) operates both in branded generics as well as generics generics segment in the domestic market although major portion of revenues comes from branded generics portfolio i.e. 94% of domestic formulations revenues. The company derives 57% of its domestic revenues from chronic segment giving revenue visiabilty and ensure margin stability. Cadila has retained its leadership position in cardiovascular, gastro intestinal, women’s healthcare and respiratory segments in the covered market. As on FY10 16 of its’s brands featured in the top 300 pharmaceutical brands in India. It has a strong field force of 4,000 people spread across 11 therapeutic focused divisions and doctor coverage of 125,000. It is expected to increase to 4,500 to cover 150,000 doctors by FY11. The company has vast product portfolio based on strong R&D capabilities which allows it to launch around 30 products every year with similar number of line extensions which fuels the growth engine of the company. New product launched during FY10 contributed 2.5% to the growth of formulations business in India.
Products Launched FY07 FY08 FY09 FY10 New Products 35 25 30 39 Line Extensions 25 30 30 1st time in India 8 10 15 17 Source: Company
Domestic business is kind of CASH COW for the company – Established business with steady margins. Inflows from the domestic business are getting utilised to expand in newer geographies, launching new therapeutic segments, penetrating existing regions etc. It provides cushion of safety to the company. Therapeutic Wise Break Up of Branded Formulations Revenues
Pain Dermatology Others 11% Management 3% Nutraceuticals Neurologicals 7% 2% 3% Cardiovascular is Respiratory the largest Gastro 10% contributor Intestinals 17% followed by Anti-Infectives Gastro Intestinals 11%
Female Biologicals 4% Healthcare 10%
Diagnostics 2% Cardiovascular 20%
Source: Company
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Initiating Coverage Cadila Healthcare Ltd.
Higher contribution Therapies FY08 FY09 FY10 from chronic Chronics 57% 57% 57% segment ensures Acute 27% 28% 27% stability of margins Biologicals 4% 3% 4% Others 12% 12% 12% Source: Company
Exports Formulations: Curently export formulations contributes 36.5% of Cadila’s gross revevues increased up from 20.1% in FY06. With company’s approach to target new markets, penetrate deeper in exisitng regions we expect contribution from export formualtion to go higher in future. 100%
Percentage share 24.5% 32.3% of Exports would 80% 37.0% 43.7% 48.2% increase…. 50.9% 52.5%
60%
40% 75.5% 67.7% 63.0% 56.3% 51.8% 49.1% 47.5% 20%
0% FY06 FY07 FY08 FY09 FY10 FY11E FY12E Domestic Exports
Source: Company, NB Research
Cadila is serving the across the globe with US, Europe, Japan and Emerging markets like Brazil, Thailand etc., thus de-risking its business model by having diversification benefits.
FY10 FY12E Japan 2% Japan 3% RoW 12% RoW 10% LatAm LatAm 12% 14% US 51% US 56% Europe 19% Europe 21%
Source: Company, NB Research 8 | Page
Initiating Coverage Cadila Healthcare Ltd.
Regulated markets US: The US generics industry accounts for largest portion in the global generics space. The recent healthcare reforms in US are expected to increase the generics contribution to the total sales and volume. The company derives largest portion of its export formulations revenues from US despite being a late entrant in US markets (entered the markets in FY05). It had been possible only through the focused approach of “Customer Centric Model”; it has adopted to capture the market. The company saw its revenues growing @67.5% CAGR from FY07 to FY10. During the short period of five years of operation in US the company has managed to garner 20% market share in its 12 out of 32 products launched which by any means is impressive also in its five years operations in US, Cadila has been ranked fastest growing generic company in US by IMS for three consecutive years.
The company targets niche, low competition, and high margins products to increase its market presence in US. Currently, it is among the top 20 generic companies in the US.
It has filed 113 cumulative ANDAs till date and out of that received 56 approvals. Cadila has a robust product pipeline enabling it to maintain filing run-rate of 12-15 every year.
To further strengthen its position in the most competitive market, Cadila has initiated the process of launching products in other dosage forms like pulmonary, nasal and injectibles. It has already filed 7 ANDAs for Nasal and 14 for Parenterals. These products are “difficult to make” ensuring higher growth and better margins.
Captive usage of API for half of the products takes care of quality and pricing related issues.
We expect that the company would outpace industry growth and would be able to continue its growth momentum. We expect Cadila’s sales from US to grow @35% CAGR for next two years.
Europe: Company operates in two key markets in Europe (1) France and (2) Spain
The company has stayed away from tender based pricing model markets like Germany. It has adopted an inorganic route to enter these markets.
France: French generics market was Euro 2.5 bn in 2009 growing at a healthy rate of 15% and covered market size is Euro 1.6 bn which is also growing @ 15%. The company marked its first footprint in the region way back in 2003 via acquiring a company called Alpharma SAS. It was the first international acquisition by Cadila. Alpharma had 109 product registrations and Euro 5 mn sales at the time of acquisition. Since then it has managed to grow its base in the market to now Euro ~46 mn of sales which is growing higher than the industry average. It has filed 60 products in France and got approval for 42 products. With more emphasis from French government to reduce the cost of healthcare we believe that France is up for structural change in respect to usage and penetration of generics market.
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Initiating Coverage Cadila Healthcare Ltd.
Spain: Spain generics market was Euro 713 mn in 2009. It’s the fifth largest market in Europe. Cadila acquired Laboratorios Combix in FY08 to enter Spain markets. Currently it has a healthy product portfolio of 30 products. In addition from FY10 onwards it has started filing for site transfers of existing products to push the margins up. We believe that the combination of new product launches and site transfers to India would derive the growth momentum for the company in Spain.
The contribution from Europe is expected to increase slowly and steadily from 7.2% in FY09 to 8.1% in FY12E. We expect European sales to grow @ 22.5% for next two years and to report Rs 411 cr of revenues in FY12E.
Japan: Japan is second largest market, of ~ $80 bn in size, only after US but as it is most difficult market to make roads in as generic penetration is still very low. Cadila adopted the acquisition route for Japan also which gives it a local face as acceptance of foreign brand and products is very low. It acquired Nippon in FY08. It has launched 24 new in-licensed products in last two years and currently draws Rs 31.6 cr revenues from the territory. Currently the base is quite small as the market is still opening up to generics. We believe that Japan offers huge growth potential to the company but it would require some more time to get noticeable share. We expect Cadila to grow at 35% CAGR in Japanese markets and to touch Rs 58 cr of revenues in FY12E.
Semi-regulated markets
Latin America: The key market in Latin America is Brazil. It is one of fastest growing market across globe, currently valued at $15 bn. Brazilian market is like Indian market in terms of characteristics: 80-90% is branded generics ensuring higher margins. Cadila Healthcare acquired Nikkho in FY08 and caters to branded generics space via this. For addressing the needs of generics generics space it has separate subsidiary named Zydus Healthcare Brasil Ltda. The company has filed 59 dossiers till now of which 20 have been approved and 14 have been launched. It is targeting 8-10 launched every year. We believe that it would grow at 20% for next two years and would report revenues of Rs 229 cr in FY12E.
Emerging Markets: Cadila is also present in 20 other high potential and high growing countries in Asia PC, Middle East, Africa and CIS region and collectively post revenue from them under emerging markets.
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Initiating Coverage Cadila Healthcare Ltd.
In FY09 Cadila had taken 70% stake in a South African company, Simayla Pharmaceuticals to penetrate deeper in the region. South African market is the only regulated market in the entire African region. Recently Cadila has taken the remaining 30% stake in the company making it a 100% subsidiary. The company has strong presence in the cardiovascular, anti-infective, respiratory, CNS, gastrointestinal and women’s healthcare segments thus leveraging its core strength. Recently it has ventured into Taiwan and has become the only Indian company to successfully start operations in that highly regulated market.
ACTIVE PHARMACEUTICAL INGREDIENTS API and Intermediaries: The company gets revenues from three various sources From India – Rs 31.8 cr in FY10 From Exports – Rs 264.2 cr From Nycomed JV (discussed later in the report under JV) – Rs 75.8 cr
Backward integration into APIs provides an edge to the company over its competitors. Besides supporting margins and smooth functioning of integrated efforts, captive usage of APIs also take care of privacy issues. Cadila has strong product pipeline of APIs which can be concluded from the fact that it filed 14 DMFs in FY10 alone taking the cumulative filings to 90. We expect Indian API business to remain flat but see a healthy growth of 17.5% in exports over next two years.
CONSUMER HEALTHCARE – Zydus Wellness Consumer Healthcare: Cadila healthcare also has a consumer healthcare and wellness business under a separate listed company - Zydus Wellness. It holds 72% in the company. Cadila split the two companies in FY08 to have focused approach for both businesses. Zydus wellness is market leader in most of the participated segments. It operates under following three segments
Segments Brand Skin Care EverYuth Sugar Substitutes Sugar Free Table Spread Margarine Nutralite Source: Company EverYuth It provides specialty range of skin care in niche segments. With its focused approach and innovative initiatives it has achieved significant market share in the covered segments. Sub Segment Position Volume Market Share Scrubs Leader 69.5% Peel Offs Leader 98.6% Face Wash 2nd Largest 13.0% Source: Company
Recently it has forayed into the emerging male grooming segment with EverYuth Menz. It is one of the few companies present in the segment. We expect the benefit of first mover advantage would soon be visible on top-line.
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Initiating Coverage Cadila Healthcare Ltd.
Sugar Free From being a “need to use product” for diabetic people to now a “preferred to use product” for health consious people, the journey of Sugar Free has been very rewarding. It is a market leader in artificial sweetners category with over 80% of market share. It is available in tablet as well as powerder form. In FY05, the company has launched ready to drink and powdered soft drink concentrate variant, ‘Sugar Free De’lite, which is also growing at a robust growth.
Nutralite Margarine as a generic term, can indicate any of a wide range of butter substitutes. The butter substitute market is slowly gaining ground in Indian markets. India is traditionally a high butter consuming market and in the past five years, there is a shift in consumption observed, whereby, consumer acceptance of healthier alternatives is increasing. Cadila acquired the brand “Nutralite” four years back. Since then it has repositioned revamed and relaunched the brand and currently it is the largest brand in the margarine category in India.
To cater to the growing demand of Sugar Free and EverYuth, which are outsourced at present, the Company is setting up a manufacturing facility in Sikkim, which is expected 12 | Page
Initiating Coverage Cadila Healthcare Ltd.
to be commissioned in 2010-11. This state-ofthe- art facility will be sufficient to meet the supply requirements for the next five to seven years.
From FY06 to FY10, the consumer business has shown a strong growth of 33.6% CAGR. In future we expect the business to post robust growth of 25% CAGR over FY10-FY12E.
ANIMAL HEALTHCARE Cadil supplies products in livestock and poultry segments through its 100% subsidiary Zydus Animal Health Ltd. In FY10 it has started catering to canine segment also with launch of eight products which has helped the company to grow the business by 8.5% in FY10 despite several unfavorable events like poor monsoon, bird flu outbreak etc. We expect the segment to post 6% CAGR over next two years and to report Rs 143 cr revenues in FY12E.
UNIQUE MODEL: JVs Cadila has adopted a unique model to grow its business. It has formed JVs with strategic partners to have long term relationship which helped the company in having higher revenue visibility and to gain from the experience of its partners. Till now it has formed three such JVs.
Zydus Nycomed Healthcare Pvt Ltd Initially started to manufacture Key Starting Materials (KSM) for Pantaprazole the scope of this JV has been increased now and 14 new products have been added. It’s a 50:50 JV between Nycomed and Zydus Cadila to manufacture APIs. To cater to the expansion the JV is setting up additional facilities which is expected to be operational soon.
Zydus Hospira Oncology Pvt Ltd This is 50:50 JV between Zydus and Hospira to manufacture and market oncology products. The JV mainly focuses on injectibles and for that it has set up a manufacturing facility in SEZ Ahmedabad. Injectibles are “difficult to manufacture” products hence ensures profitability. FY10 was the first year of commercial operations for the JV with three products for European region. It has also started supplying to India. Company is also eyeing US region. We believe soon the company would start supplying to US also and expect it to launch 1-2 more products in Europe in FY11.
Zydus BSV Pharma Pvt Ltd Zydus Bharat Serum and Vaccines Pharma Pvt Ltd (ZBSV) is again a 50:50 JV between two companies. It operates in novel patented as well as generic oncology contract segment. In Indian region, a patented drug “NUDOXA” has been launched which continues to grow at encouraging rate. The JV has completed Phase I clinical trials of a novel patented product and approval for the same have been filed in the US and Europe. Also Phase II/III has been started on the product for semi-regulated markets including India. We expect meaningful contribution of revenues to start from FY12E although we have not included any numbers from the JV in our projections.
Abbott Deal: Zydus Cadila and Abbott have signed a pact for 24 products to be marketed in 40 emerging markets. The deal holds option to increase the scope of products by 40 additional products also. As per the agreement, Abbott would license 24 branded generics products of Zydus in pain, cancer, cardiovascular, neurological, and respiratory therapeutic segments. It’s a win-win situation for the parties as it gives an opportunity to Zydus to leverage its
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Initiating Coverage Cadila Healthcare Ltd.
product portfolio and manufacturing facilities and provides a window to Abbott to increase its penetration and fuel its growth in the targeted markets. In May 2010, Cadila has received Rs 47.36 cr ($10 mn) as milestone payment. Meaningful revenues from product launched would start kicking in from FY12. We are positive on the future prospects of this deal.
RESEARCH AND DEVELOPMENT Cadila aims to be innovation driven research based company by 2020. It has a strong team of total 900 scientists involved in NME, NDDS, Biologics and API research. It is one of few companies in India which gives thrust on R&D and consider it an area of future growth. With R&D facilities in place, the 250 12.0 company has reduced its capital 10.0 R&D expenditure. 200 But to support its 8.0 future growth Cadila 150 is committed to 6.0 spend more on 100 Revenues R&D. 4.0 50 2.0
0 0.0 FY06 FY07 FY08 FY09 FY10
Revenue Expenditure Capital Expenditure % to Sales
Source: Company
Division Of Talent Pool
API 150
NME 350
Generics 280
Biologics 120
Source: Company
R&D activity can be further be classified as: New Molecule Entity (NME): 12 different projects are undergoing out of which 10 are being handled by company alone and two are in collaboration. Main focus areas of NME research are: cardiometabolic, inflammation, pain, and oncology. The company has strategic R&D collaboration with Karo Bio and with Eli Lilly giving it an opportunity to gain from market leader’s experience.
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Initiating Coverage Cadila Healthcare Ltd.
Drug Lead Precli Phase Phase Phase Project Target Indication Discovry Optimisatn nical IND I II III NDA
PPAR alpha ZYH1 :gamma Dyslipidemia
ZYI1 Multi-model Pain
CB-1 Obesity, ZY01 antagonist Diabetes
PPAR alpha
ZYH2 :gamma Diabetes
ZYH7 PPAR alpha Dyslipidemia
TR beta ZYT1 agonist Dyslipidemia
GLP-1
ZYD1 agonist Diabetes
GLP-1 ZYOG1 agonist Diabetes
Undisclosed Diabetes Atherosclero Undisclosed tic Plaque
Collaborati Selective GR ve agonist Inflammatn with Karo Bio
Collaborati with Eli ve Undisclosed CVS Lilly Source: Company
Biosimilars and Novel Biologics: The Company is equally dedicated on biosimilars and novel biologics front with 120 strong scientists’ strength. It is developing 15 biosimilar products which include therapeutic proteins and therapeutic monoclonal antibodies. A new state-of-the-art manufacturing facility for manufacturing biologics near Ahmedabad has commissioned and will cater to the global business requirements of biosimilars.
Vaccines Research and Development: In FY09 the company acquired Etna Biotech, an Italy based vaccine research company. With this Cadila is constructing state- of-the-art Vaccine Technology Center near Ahmedabad for further expansion of vaccine research programs. Its continuous efforts to innovate have resulted in development of in-house high quality H1N1 Flu (swine flu) vaccine which has been launched by the company in India recently. It has also developed Rabies vaccine. There are various other segments of research also which the company is conducting on on-going basis like New Drug Delivery Systems (NDDS) which
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Initiating Coverage Cadila Healthcare Ltd.
mainly caters to the needs of generic industry. Other field of research is API Chemical Process Research which fulfills the requirement of API business for both domestic and foreign markets.
RECENT UPDATE During the Q1FY11, the company rewarded its shareholders with bonus shares of 1:2, which has increased the number of equity shares from 13.6 cr to 20.5 cr.
QUARTERLY RESULT ANALYSIS – Q1FY11 Cadila reported robust sales growth of 20.1% yoy on back of strong support from domestic formulations (17.3% yoy), consumer (36.2% yoy) business and from US Sales (50.8% yoy).
Margins enhanced on improved product mix, lower manufacturing cost, and higher API sales. Milestone payment of Rs 47.36 cr from Abbott also gave a push to margins in this particular quarter.
Particulars (Rs in Cr) Q1FY11 Q1FY10 yoy Q4FY10 qoq
Net Sales 1,055 880 20% 816 29% Other Op. income 79 23 239% 31 156% Total Income 1,134 904 25% 847 34% Cost of materials 326 283 15% 291 12% Personnel Exps 128 102 25% 108 18% Other exps 383 315 22% 258 48% EBITDA 297 204 46% 189 57% margins (%) 26% 23% 22% Depreciation 31 30 6% 40 -21% PBIT 266 174 53% 149 78% Interest 32 24 30% 17 87% Other Income 3 4 -32% 5 -44% PBT 237 154 54% 138 72% Tax 34 24 39% 7 399% Tax rate (%) 14% 16% 5% PAT 204 130 57% 131 55% Minority Interest 4 4 12 EO items 0 1 0 PAT reported 199 125 60% 119 68% margins (%) 18% 14% 14%
Equity Capital (FV Rs 5) 102 102 102
EPS 9.7 6.1 60% 5.8 68%
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Initiating Coverage Cadila Healthcare Ltd.
PEER COMPARISON We are comparing Cadila Healthcare with Lupin, Sun Pharma, Cipla, Dr Reddy and Biocon as all these companies caters to domestic as well as export markets. Cadila Healthcare is a mid size player compared to its peers but has better growth prospects in future. It has best return ratios among the compares players with lowest EV/Sales and EV/EBITDA only after Biocon. This provides further scope for the stock price to increase.
We expect total revenues of Cadila to grow at a CAGR of 19.3% over the next 2 years but higher growth in bottom-line which is expected to report CAGR of 28.1% for the same period. On the valuation front, the company is currently trading at 3.5x EV/Sales which is significantly below the peer group average of 5.0x giving an opportunity for investment in the stock. Based on these multiples Cadila looks fairly attractive as compared to its peers.
FY10 Sales EPS Price Mcap EV PE RONW EV/S EV/EBITDA P/BV
Consolidated (Rs in Cr) (Rs) (Rs) (Rs in Cr) (Rs in Cr) (x) (%) (x) (x) (x)
Lupin 4,871 15.3 376 16,723 17,661 24.5 26.5 3.6 18.0 6.5 Sun Pharma 4,103 65.2 1,746 36,154 35,718 26.8 17.3 8.7 26.2 4.6 Cipla 5,360 13.5 307 24,609 24,552 22.7 18.3 4.6 23.0 4.2
Dr Reddy 4,553 50.1 1,404 23,697 23,892 28.0 14.3 5.2 20.3 4.0 Biocon 2,368 14.7 346 6,917 7,291 23.6 16.7 3.1 15.5 3.9 Average 4,251 31.8 21,620 21,823 25.1 18.6 5.0 20.6 4.6
Cadila 3,687 24.7 614 12,576 12,792 24.9 31.0 3.5 15.8 7.7
RISKS & CONCERNS
Currency Fluctuations Currently the company derives around 50% of its revenues from exports markets which is expected to increase in future. Any adverse currency movement (like the industry witnessed in FY09) will impact the realizations of the company and eventually impact the margins of the company which would lead to a deviation from our estimates.
Delay in ANDA approvals from USFDA FDA has become stringent in providing approvals for ANDAs as well as for plant approvals. Due to this and increased filings from players the average approval time has been increased to 24 months which has impacted the industry in general. Any further increase in approval run-rate would delay the projections and would impact the bottom-line of the company.
Change in regulatory guidelines in emerging markets Any changes by the regulatory body of respective countries (like Germany market moved to tender based pricing from OTC and prescription markets initially) would impact the business prospects of the company and cast a doubt on our projected numbers.
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Initiating Coverage Cadila Healthcare Ltd.
VALUATION AND RECOMMENDATION
We believe that Cadila net sales will grow at a CAGR of 19.3% over a next two years whereas net profit is expected to grow at a higher CAGR of 28.1% during the same period, on account of sales from newer territories, new product launches, and deeper penetration in existing regions. Also strong growth in domestic markets will support the expansion plans of the company, domestic business also acts as cushion to the company incase anything undesirable happens in newer areas. Management has guided of $1bn (~ Rs 4,600 cr) sales in FY11 which translates into 24.8% growth over FY10 sales and $3 bn by 2015, growth of 30% CAGR. Being on conservative basis we are projecting Rs 4,446 cr sales in FY11E, a growth of 20.6%.
We expect the company to earn an EPS of Rs. 32.0 in FY11E and Rs. 39.5 in FY12E. At the CMP of Rs. 625 per share, Cadila is currently trading at a PE of 19.9x FY11E and 15.5x FY12E EPS which looks attractive given the revenue visibility of the company. We believe that the company has done the groundwork and has made investments in right direction like acquisitions done to enter new regions and business segments and now it is the right time to enjoy the fruits of all those efforts.
The company has historically traded at a PE multiple in the range of 19-21x (as shown in the PE Band below). We believe that Cadila should be valued on a PE multiple of 20x. Based on our EPS of Rs. 39.5 for FY12E and a target multiple of 20x we arrive at target of Rs. 790. Consequently, we initiate with a BUY rating on the stock with a target price of Rs. 790, indicating a potential upside of 28.7%.
1 yr Forward PE Band
900.0
800.0
700.0
600.0
500.0
400.0
300.0
200.0
100.0
0.0 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10
Price 5 10 15 20 25
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Initiating Coverage Cadila Healthcare Ltd.
P&L (Rs. Cr) FY09A FY10A FY11E FY12E Balance Sheet (Rs Cr) FY09A FY10A FY11E FY12E Revenues 2927.5 3686.8 4487.1 5367.8 Share Capital 68.2 68.2 102.4 102.4 % change 26.0% 25.9% 21.7% 19.6% Reserves & Surplus 1167.0 1560.3 2007.0 2622.0 EBITDA 605.8 808.6 996.1 1223.9 Minority 22.8 39.2 72.5 115.1 EBITDA margin 20.7% 21.9% 22.2% 22.8% Net Worth 1258.0 1667.7 2181.8 2839.4 Depn & Amort 111.8 133.9 146.6 159.9 Deferred Tax Liab 131.6 114.1 114.1 114.1 Operating income 494.0 674.8 849.5 1063.9 Total Loans 1267.4 1090.5 1028.5 978.5 Interest 120.4 82.1 79.5 75.3 Total Liabilities 2657.0 2872.3 3324.4 3932.0 Other Income 20.3 15.9 13.5 13.5 Net Fixed Assets 1529.8 1684.4 1754.4 1861.2 PBT 393.9 608.5 783.5 1002.1 Capital WIP 155.5 211.1 144.4 177.8 Tax 66.6 74.1 117.5 150.3 Pre operative Exps 33.4 37.1 37.1 37.1 MI and EO 24.2 29.3 33.3 42.6 Investments 24.9 20.7 20.7 20.7 PAT 303.1 505.1 632.7 809.2 Cash & Bank 251.7 250.7 649.0 1177.3 Sh o/s - Diluted 20.5 20.5 20.5 20.5 Debtors & Other CA 1353.2 1534.4 1875.5 2178.6 Adj EPS 14.8 24.7 30.9 39.5 CL & P 691.5 866.1 1156.7 1520.7 Cash EPS 20.3 31.2 38.1 47.3 Net CA 913.4 919.0 1367.8 1835.3 Quarterly (Rs. Cr) Sep.09 Dec.09 Mar.10 Jun.10 Total Assets 2657.0 2872.3 3324.4 3932.0 Revenue 945.8 991.0 846.5 1133.8 Cash Flow (Rs. Cr) FY09A FY10A FY11E FY12E EBITDA 205.7 210.0 189.3 297.4 Operating Cash Flow Dep & Amorz 31.1 33.4 39.8 31.4 Net Profit before tax 581.7 804.0 996.1 1223.9 Op Income 174.5 176.6 149.5 266.0 Change in WC -93.3 -40.2 -50.5 60.8 Interest 20.6 21.7 15.8 22.4 Tax -66.6 -74.1 -117.5 -150.3 Other Inc. 4.1 2.5 5.1 2.9 CF from Operation 421.8 689.7 828.1 1134.4 Forex Loss (Gain) 2.5 -3.8 1.1 9.2 Investing Activities PBT 155.6 161.2 137.8 237.3 Capex -424.0 -330.1 -150.0 -300.0 Tax 17.6 25.5 6.8 33.8 Oth Inc & Investments 20.8 20.1 13.5 13.5 MI & EO 6.1 6.0 12.3 4.3 CF from Investing -403.2 -310.0 -136.5 -286.5 PAT 138.0 135.7 131.0 203.5 Financing EPS (Rs.) 6.4 6.3 5.8 9.7 Diviend Paid -79.6 -123.7 -151.8 -194.2 Performance Ratio FY09A FY10A FY11E FY12E Share Capital 5.4 0.0 0.0 0.0 EBITDA margin (%) 20.7% 21.9% 22.2% 22.8% Loans & Others 214.7 -257.0 -141.5 -125.3 EBIT margin (%) 16.9% 18.3% 18.9% 19.8% CF from Financing 140.5 -380.7 -293.3 -319.5 PAT margin (%) 10.4% 13.7% 14.1% 15.1% Net Chg. in Cash 159.1 -1.0 398.3 528.4 ROE (%) 24.5% 31.0% 30.0% 29.7% Cash at beginning 92.6 251.7 250.7 649.0 ROCE (%) 15.1% 20.4% 21.4% 22.5% Cash at end 251.7 250.7 649.0 1177.3 Valuation Ratio FY09A FY10A FY11E FY12E Per Share Data FY09A FY10A FY11E FY12E Price Earnings (x) 41.5 24.9 19.9 15.5 Adj EPS 14.8 24.7 30.9 39.5 Price/BV (x) 10.2 7.7 6.0 4.6 BV per share 60.3 79.5 103.0 133.1 EV / Sales 4.6 3.6 2.9 2.3 Cash per share 12.3 12.2 31.7 57.5 EV / EBITDA 22.4 16.6 13.0 10.1 Dividend per share 3.0 5.0 6.2 7.9
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Initiating Coverage Cadila Healthcare Ltd.
Note
Disclaimer This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities Pvt Ltd). The information, analysis, and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in, anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors, or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.
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