Weaker US sales weigh on Cadila

Even as one expected some softness in Cadila Healthcare’s December quarter performance, the weak show stumped the Street.

Thanks to demonetisation-led softness in domestic growth and continuing regulatory (US drug regulator FDA) issues related to its Moraiya (Madhya Pradesh) unit, not much was expected. But, US sales fell more than expected, disappointing the market, the stock falling seven per cent to close at ~350odd on Tuesday.

Revenues at ~2,364 crore, down 1.8 per cent over a year, came lower than the Bloomberg consensus estimate of ~2,433 crore. Domestic sales (contributing a third to overall revenue) grew 10 per cent over a year to about ~800 crore. It was impacted by demonetisation, ban on fixed dose combination drugs and price control.

Pressure on US sales has intensified, with the base business seeing more competition. After Moraiya came under the FDA scanner, the US sales were still being driven by the opportunity from arthritis and malaria treatment drug Hydro chloroqu in e' s(HCQS ') generics. In the December 2015 quarter, 20 per cent of US sales growth was driven by HCQS but in the quarter a year later, this contribution was much lower. Even launch of ulcerative colitis drug, Ascorol HD's authorised generic in July 2016 was not able to compensate for the decline in base business. US sales (46 per cent of revenue) at ~1,072 crore in the year-ago quarter fell to ~890 crore in the December 2016 quarter, 38 per cent of overall revenue.

With stress on the US base business, operating earnings at ~404 crore were substantially lower than the prior estimate of ~526 crore. Net profit at ~258 crore, down 39 per cent year-on-year, was 20 per cent lower than the estimate of ~353 crore.

Since growth pressure has intensified in the US business, investors can expect the stock to remain subdued, at least till Cadila is able to resolve the FDA issues on Moraiya or drive growth through other measures. In the best case scenario, analysts expect two to six months for resolving Moraiya.

The company is doing its bit to drive growth. It recently acquired Sentynl Therapeutics, a US-based company to drive its speciality pain management business. Though Sentynl is marketing some products, Cadila is banking on the company’s pipeline of products and utilising Sentynl’s distribution channels to market its own pain-relief products. Cadila also made almost 30 filings in the December quarter, of which at least 20 are from other facilities. Analysts, however, expect a sharp ramp-up in the US business only in the medium term.

Higher competitive intensity in US base business impacted Dec quarter and will keep the stock under pressure until resolution of Moraiya unit's issues with FDA