Cadila Healthcare Heading For Tough Waters Due To Lack Of Big Approvals In US

Cadila Healthcare is one of the few Indian drugmakers that boasts of having a presence across the spectrum of the pharmaceutical value chain, starting from bulk drugs to formulations, vaccines to biosimilars, and speciality drugs to consumer health.

However, despite these capabilities, it is one of the stocks that has been underperforming in 2019. Shares of the Ahmedabad-based drugmaker dropped 30 percent on the BSE in 2019 compared to a 5.4 percent decline in S&P BSE Healthcare index in the same period.

The first six months of FY20 hadn’t been any great for the company. The EBITDA margins dropped to around 18 percent in H1FY20 compared to 23 percent in the same period of the previous year. The net profit fell 54 percent YoY to Rs 397.7 crore in H1FY20.

This wasn’t the case two years ago. Following the successful resolution of the USFDA warning letter on Moraiya plant in Sanand, Gujarat, things were looking extremely bright for the company. The abbreviated new drug application (ANDA) approvals in its largest market, the US, surged following the resolution. The US contributes almost half of the total revenues.

The company received 77 ANDA approvals, the highest ever in FY18. The approvals included exclusive opportunity in mesalamine (generic version of Lialda) and limited competition for oseltamivir powder (generic version of Tamiflu).

The EBITDA (Earnings before Interest, Depreciation, Taxation and Amortisation) in FY18 improved 400 basis points to 23.9 percent. The following year, FY19, too wasn’t bad. The company received 74 ANDA approvals. Even on a bigger base, it still managed to grow the US sales by 8 percent and with EBITDA margins at 22.6 percent.

What is holding the company back?
Several factors are playing simultaneously. The US business, while is growing, isn’t growing as it used to due to intense competition to its key products such as generic Lialda, generic Androgel (testertone gel) and speciality anti-pain drug Levorphanol.

In a huge setback to the company, the crucial Moraiya plant that contributes about 45 percent of company’s US sales received a warning letter from USFDA early this month for certain deviations in current good manufacturing practices.

A warning letter doesn’t affect existing supplies but leads to withholding of new product approvals. Much of the injectable pipeline is filed from Moraiya.

The management in recent earnings call initiated site transfers of injectables from Moraiya to Liva facility and is expected to complete filing by FY20. The company said it is working towards getting the facility ready for re-inspection at Moraiya by June 2020.

The acquisition of Rs 4,595-crore acquisition of Heinz India’s consumer wellness business, which includes popular brands Complan and Glucon D, will take some time to deliver and a higher consolidated debt due to the acquisition would cap shareholder returns in FY20.

What are analysts saying?

“Low visibility on large-sized, limited-competition launches in the US, while Moraiya plant issues have led to material downgrade in FY20 US sales guidance,” said Ambit Capital in its recent report.

Ambit report further added that the dilutive impact of biosimilars and vaccines ramp-up owing to competitive pressures; and Heinz India portfolio operating at lower margins versus Zydus Wellness, will be resulting in only 2 percent EBITDA increase in FY21.

“We expect the US business to exhibit a flattish trend as new approvals will be at best offset by the erosion in existing large assets. Domestic and Wellness businesses should grow in low-mid teens and high single-digits, respectively,” said Nirmal Bang in its report.

“The rest of the business, which includes API, Joint Ventures and LATAM markets, will grow in high single-digit,” Nirmal Bang added.
“The debt isn’t going to be a huge problem.

Meanwhile, the company has guided for 15-plus new launches in the remaining part of FY20 and is also lining up transdermal patches and injectables from Liva facility for US launches.-Money Control