Launches bring little cheer for Cadila

Pricing pressure is negating upsides from new products

Cadila Healthcare recently got an approval for generic version of Tamiflu, a medication used in treating influenza (flu). It is the first generics player to get an approval for the drug with sales of $367 million, for trailing 12 months ended July, according to industry body IMS. Analysts expect Lupin and Natco, too, to get the go ahead. This is a key positive, as the approval has come just before the flu season, which, according to analysts at Nomura, could help the company gain strong market share. They, however, believe sales could fluctuate quite a bit, depending on the strength of the flu season and number of competitors.

Despite the approval, analysts are circumspect about the overall gains. The argument is any gains from Tamiflu could be negated due to additional competition in generic of Lialda used in treating ulcerative colitis and potassium citrate tablets, a cure for kidney stones. Why additional competition is a problem for Cadila, especially in Lialda, is because this is the drug which was expected to contribute the lion’s share of earnings improvement in FY18.

Analysts at IIFL say EPS for Cadila is expected to improve from ~1.4 in the June quarter of FY18, to ~6.4 in the March quarter of FY18, largely due to Lialda which was launched in July 2017. The brokerage has downgraded the company’s EPS estimates by 10-12 per cent for FY18 and FY19.

While analysts believe the company is better placed, given the cumulative pipeline of 310 applications and 128 approvals coupled with no regulatory issues at any of its production facilities, revenue and profits are impacted by steep a price erosion. In addition to its own approvals, the company will look at its specialty drug portfolio to improve sales. The acquisition of US-based Sentynl, which is in the speciality pain management segment, could help reach the company’s goal of 30 per cent contribution to its US revenue over the next three years.

Despite the slew of approvals, the stock has been giving up its gains over the last months on worries that the pricing pressure will eat into its profit margins. The run-up in the stock after the approval for Moraiya plant, according to analysts, already factors in the positives. At the current price, the stock is trading at 22 times its FY19 estimates, which is at 15-20 per cent premium to large peers.