Cadila Healthcare is aiming high: it is gunning for revenues of R10,000 crore by FY 2016. India’s fourth largest pharmaceutical company, and the manufacturer of India’s first new drug Lipaglyn, aims to accelerate growth by expanding product offerings in the area of new drugs, biosimilars and generics.
Even as the drugmaker gears up for potential new drug launches to boost profit, it also grapples with loss making foreign subsidiaries and cross currency risks arising out of hedges taken at lower rates.
Pankaj Patel, CMD of Cadila Healthcare, says his firm is focussed on innovation, new chemical entities (NCEs), biologics and transdermals. “We will focus on our four big markets—India, US, Brazil and Mexico—to drive growth with deeper penetration and new product launches,” Patel says. In FY14, India contributed 34% to Cadila’s total revenue, while USA and Brazil contributed 30% and 3% respectively.
Patel’s focus on innovation is exemplified by the drug pipeline that includes three novel biologics, 10 vaccines, and two new chemical entities (NCEs) that are expected to complete phase 1 of clinical trials by the end of calender year 2015. “Our NCE Lipaglyn is performing very well. There are over 70,000 patients that are now using this drug. We are developing drugs for additional indications including NASH (liver inflammation) and tuberculosis,” Patel adds.
In December 2014, Cadila had launched Exemptia, the world’s first biosimilar version of Humira, in India. Humira generates sales to the tune of $3.3 billion in the US and is used to treat auto immune disorders.
Cadila has a pipeline of 17 biosimilars and Patel says the company is awaiting regulatory approvals to sell biosimilars in emerging countries, the US, and Europe. There are seven biosimilars- in different stages of development- for treating indications such as oncology, infectious diseases, inflammation and infertility. Patel believes these could be a significant contributor and in five years time biosimilars should contribute approximately 10% to the firm’s revenues.
In the generics space, Cadila has filed 255 ANDAs, and has got 98 approvals so far, while 157 are pending for approvals. Analysts expect a pick-up in the pace of new generic drug launches to spur growth over the next two years. “Cadila may get approval of 200 abbreviated new drug applications (ANDAs) over the next three years (that) would drive 25% revenue CAGR and 41% net profit CAGR over FY15-17. Ebitda margins are likley to expand from 20.3% in FY15 to 22.8% in FY17,” an Ambit Capital report observes.
Some key generic drug launches are expected to include Lialda, Asacol HD, and Abilify to boost profitability. Cadila has focused on building its presence in niche areas like transdermals and nasal sprays. The transdermal US market, for example, is worth $2 billion with four to five players.
Brokerage Motilal Oswal estimates that the contribution from this niche and low competition portfolio can be scaled up to $100 million by FY17 (11% of US business) with over 35% margins. Analysts say Cadila Healthcare may also consider acquisitions that allow the drug firm to increase its presence in countries like the US, in Latin America and other emerging markets to drive growth. “Cadila’s historical track record on acquisitions has been unimpressive (for example, Biochem, Nesher). Hence, we would be cautious of any large ticket acquisitions,” it cautions.
On April 13 Cadila Healthcare sought approval of shareholders to enhance the borrowing limit to R10,000 crore.
But Patel says the company might raise money if market conditions are good. “We will decide if there is an opportunity. Currently, there is no concrete plan to raise capital but we have taken this provision because it takes three to four months to get approvals,” he explains.
Analysts also point out the slowdown in growth of Cadila’s consumer business coupled with losses incurred in emerging markets. “Emerging markets and Nesher (US subsidiary) incurred a loss of approximately R300 crore (i.e. 25% of Ebitda) in FY2014. While we are hopeful of a turnaround in Nesher (loss of R72 crore in FY14), we do not anticipate a quick turnaround in other businesses,” notes the Ambit Capital report.
Patel said the company is not considering acquisitions in south east
Asia, Latin America, and Mexico, although these are important markets for Cadila. “We believe our emerging
markets including Brazil and Mexico are going to be future growth drivers,” Patel added.
Potential risks in the short term include the form 483 issued to Cadila’s Moraiya facility by the US Food and Drug Administration (US FDA) in
September 2014. Patel said the company has submitted its response and the
same is being reviewed by the regulator. “There is no issue with the Moraiya facility but we cannot comment about
it. We are currently supplying drugs to the USA,” Patel said.
Also, according to analysts, Cadila has an exposure of approximately 12% to RoW sales. Analysts are wary of cross currency risks, since they say Cadila has not been a beneficiary of the Indian rupee depreciation against the US dollar —mainly because of the hedges taken at lower rates.
“However, the company has now negligible hedges and in the event of a reversal in trend, the company’s profits could decline by 1.5% for every 1% appreciation in the rupee beyond R62 per dollar level,” Khemka and Dave said.
Brokerage Motilal Oswal is of the view that unfolding of niche products in US as well as improved domestic business performance will sustain earnings momentum.
“We forecast 29% core earnings per share (EPS) CAGR to be driven by robust 20% revenue growth and cumulative 220 bp Ebitda margin expansion. Improved profitability and resultant free cash generation would also help to reduce leverage,” the brokerage observed in a recent report.