Growth worries ahead for Cadila after Q1 estimate miss

With mega products in US facing rising competition, analysts watchful on new launches

Cadila Healthcare saw its stock price tumble 5.83 per cent on Monday post its June quarter performance, which fell short of expectations. Pricing pressures in the US market led to lower-than-expected growth, both in the US as well as for its consolidated business. US sales, which contribute about 44 per cent to revenues, grew 27 per cent yearon-year against expectations of about 70 per cent, according to estimates of Motilal Oswal Securities.

The company has been a beneficiary of product approval for new launches after resolving issues with the USFDA. Further, it has benefitted from limited competition or niche opportunities, as was the case with ulcerative colitis drug Lailda and flu treatment medication Tamiflu.

However, higher competition from Teva’s Lialda version as well as decline in Tamiflu’s contribution after the flu season impacted the performance. Decline in US sales of about 25 per cent sequentially was much more than estimates. The company had seen just two per cent price erosion during the previous quarter, said analysts.

Domestic business (a third of overall revenues) was expected to grow well on a low base of last year (impacted by GST-led destocking). Thus, while India sales did grow 40 per cent year-on-year, overall revenues from operations at ~28.9 billion fell short of the ~30.65 billion consensus estimates by analysts. Operating profits at ~6.45 billion, though up 133 per cent year-onyear, declined about 26 per cent sequentially. Net profit at ~4.61 billion was up 233 per cent year-onyear, aided by higher other income, but declined 22 per cent sequentially.

The company had launched nine products in the US during the quarter. With significant rise in the approval rate for new product launches in the last one year, the momentum continued in June quarter as the company received 13 new approvals for product launches. It thereby plans more than 50 product launches in FY19. What should help offset increased competition for Lialda are Toprol (hypertension), Asacol HD (cholesterol), Exelon (transdermal patch), Prevacid ODT (acid-reflux) and anthelmintic drug Albenza generics.

The company recently launched Toprol generics, while it is also launching Asacol HD. For Asacol, the firm has already been marketing authorised generics and now its own generic launch can provide further boost to profitability (having higher gross margin of 70-75 per cent versus 20-25 per cent on the authorised generics, say analysts). Elara Capital expects an additional ~1.4 billion contribution to the operating profit from the launch of Asacol.

While the street will eye progress of the launches in the September 2018 quarter, the company will have a disadvantage of the high base of Lialda in the year-ago quarter. The company believes that as new launches ramp up, most benefits will start accruing in the second half of FY19, and is confident of continuing growth momentum in the US. Analysts at ICICI Securities said the management continues to guide for 10-12 launches every quarter, including some limited competition launches in the US. However, acute pricing pressure in the US, led by enhanced competition and client consolidation, is likely to mitigate launch opportunities.

The company has announced the acquisition of 51 per cent stake in Dehradun-based Windlas Healthcare for expanding its pharma manufacturing footprint. Cadila plans to transfer some product filings to the Windlas USFDA approved facilities and thus, benefits of the same will start accruing over time. For India, the company is looking at growing the biologicals and vaccines segment, in·licensing arrangements, and improving field force productivity, among others.