Cadila Healthcare
Institutional Equity Research
Pharmaceuticals | India
4QFY15 Result Update
Cadila Healthcare
BUY
Robust 4Q; US drives growth
CMP* (Rs)
1,689
Cadila Healthcare (Cadila) reported an upbeat 4QFY15 at the operating level.
Sales (up 17% yoy), margins at 21.8% (up 520bps) and APAT (46% yoy) were
led by US. US and India (comprise 70% of sales) sustained healthy growth while
Europe and Latam suffered from channel rationalization. The company seems to
be in gestation period in the ROW markets. We believe the growth story in US
will unfold over the next 3 years attaining sales of US$800mn with Cadila
awaiting 161 approvals (260 filed, 99 approved). In the past, Cadila had
expanded rapidly across geographies and technology platforms with significant
investments in transdermals, nasals and vaccines, which will start yielding results
from FY16E onwards followed by biologics and respiratory. In our view, the
monetization of the US filing efforts can deliver significant upside to the current
earnings expectations. Maintain BUY with a Target Price of Rs2,025.
Target Price (Rs)
2,025
4QFY15 Result snapshot
Others
Top-line grew by 17.3% yoy, in-line with our estimate, led by the US (up 44.3%
yoy). While India (up by 8.8% yoy) continues to post subpar growth, ROW (up 8%
yoy) and JVs (up 5.2% yoy) were below estimates. Latam (down 8.4% yoy) and
Europe (down 12.4% yoy) continue to remain weak impacted by channel
rationalization. 500bps yoy increase in gross margins (at 65.1% yoy) led the
operating margins improvement of 520bps at 21.8% on a yoy basis. The strong
operating performance was led by ramp up in new launches and ramp up in
market share from HCQS in the US.
Upside/ (Downside) (%)
20
Bloomberg Ticker
CDH:IN
Market Cap. (Rs mn)
345,837
Free Float (%)
25
Shares O/S (mn)
205
Shareholding Pattern (%)
Dec’14
Mar’15
74.8
74.8
6.7
6.4
Promoter
FII
DII
(Rs mn)
8.0
8.3
10.6
10.5
FY15
FY16E
FY17E
Sales
84,971
102,711
119,831
EBITDA
16,299
20,450
25,289
APAT
11,939
14,362
17,704
EPS (Rs)
58.3
70.1
86.5
DPS (Rs)
12.0
12.0
12.0
FY15
FY16E
FY17E
P/E (x)
29.0
24.1
19.5
P/B (x)
8.1
6.4
5.0
EV/EBITDA
22.2
17.6
13.8
RoE (%)
28.1
26.7
25.9
0.7
0.7
0.7
Key concall takeaways
Outlook and Valuation
220
200
180
160
140
120
100
CNX Pharma
May-15
Apr-15
Mar-15
Jan-15
Feb-15
Dec-14
Oct-14
Cadila
Nov-14
Sep-14
Jul-14
80
Aug-14
(1) Timely approvals for Asacol HD, Abilify, Lailda and Prevacid ODT are critical,
(2) Launch of Controlled Substances from Nesher (consent decree expected to
be resolved by FY16E), transdermals (expect 2 launches in 2HFY16E) and
vaccines (intend to make Lipaglyn a mega brand; expect few launches by FY17E
in India), (3) Clean chit for Moraiya and Ahmedabad (under 483) and (4)
Respiratory filings to begin by FY17E.
1 Year Relative Price Performance
Jun-14
Key factors to watch for
Divi. Yield (%)
May-14
(1) Guidance reiterated: Sales of Rs100bn with EBITDA margins at 21% led by
US, double-digit growth in India for FY16E. US-guided for 40 filings-50% in
complex space, most filings from Baddi, Moraiya and SEZ, (2) Has witnessed fast
pace approach from USFDA in terms of CRLs and TADs, but conversion to final
approvals remain sticky, (3) Cadila continues to apprise USFDA of its progress in
Moraiya and awaits re-inspection, (4) Net debt stands at Rs2bn, D/E at 0.5x for
FY15, (5) Tax rate is guided at 17%, capex at Rs5.5bn and R&D at 6-7% for
FY16E and (6) No plans to raise funds in the near future.
Nifty
Note:* CMP as on May 15, 2015
Led by complex US launches (28% CAGR over FY15-17E), end of consent
decree in Nesher Pharma by FY16E and double-digit growth in India
formulations, we forecast Cadila to report 19%/22% CAGR for sales and APAT,
respectively over FY15-17E with steady improvement in base margins at ~20%.
We remain excited by the portfolio mix and maintain BUY with a Target Price of
Rs2,025.
May 15, 2015
Research Analyst: Sapna Jhawar
Contact: 022-3320 1641
Email: [email protected]
P a g e |1
Institutional Equity Research
Cadila Healthcare
Pharmaceuticals | India
4QFY15 Result Update
Risks to the view

Lower-than-expected product mix and slower than anticipated launches in
the US could pull down the margins posing a risk to our estimates.
Exhibit 1: Quarterly performance
(Rs mn)
Net Sales
Material cost
% of net sales
Staff costs
% of net sales
Other expenses
% of net sales
Total operating exp.
Operating profit
OPM (%)
Interest
Depreciation
EBIT
Other Income
PBT
Total tax
Tax Rate (%)
Minority Interest
Adjusted PAT
Net profit margin (%)
Extra-ordinary Items
Forex (loss)/gain
Others
Reported Net profit
Reported EPS (Rs)
4QFY15
22,471.2
7,831.3
34.9
3,140.8
14.0
6,593.5
29.3
17,565.6
4,905.6
21.8
120.8
755.4
4,029.4
614.5
4,643.9
707.5
15.2
68.3
3,868.1
17.2
(364.3)
(400.0)
35.7
3,503.8
17.1
4QFY14
19,163.3
7,644.3
39.9
2,735.7
14.3
5,587.5
29.2
15,967.5
3,195.8
16.7
271.4
527.8
2,396.6
677.0
3,073.6
347.6
11.3
72.3
2,653.7
13.8
(261.8)
(125.0)
(136.8)
2,391.9
11.7
% yoy
17.3
2.4
14.8
18.0
10.0
53.5
(55.5)
43.1
68.1
(9.2)
51.1
103.5
(5.5)
45.8
39.2
46.5
3QFY15
21,595.4
7,638.2
35.4
3,170.4
14.7
6,644.9
30.8
17,453.5
4,141.9
19.2
137.4
707.2
3,297.3
396.3
3,693.6
791.0
21.4
138.6
2,764.0
12.8
49.1
3.0
46.1
2,813.1
13.7
% qoq
4.1
2.5
(0.9)
(0.8)
0.6
18.4
(12.1)
6.8
22.2
55.1
25.7
(10.6)
(50.7)
39.9
24.6
FY15
84,971.2
31,866.5
37.5
12,085.2
14.2
24,720.6
29.1
68,672.3
16,298.9
19.2
612.6
2,872.5
12,813.8
2,095.9
14,909.7
2,594.2
17.4
376.6
11,938.9
14.1
(433.0)
(328.6)
(104.4)
11,505.9
56.2
FY14
71,149.6
27,065.0
38.0
10,711.0
15.1
22,392.0
31.5
60,168.0
10,981.6
15.4
1,181.0
2,012.3
7,788.3
1,941.0
9,729.3
1,060.0
10.9
326.4
8,342.9
11.7
(306.5)
(135.0)
(171.5)
8,036.4
39.2
% yoy
19.4
17.7
12.8
10.4
14.1
48.4
(48.1)
42.7
64.5
8.0
53.2
144.7
15.4
43.1
41.3
43.2
Source: Company, RSec Research
Key Highlights
Margin improvement-positive: Operating margins expanded by 520bp yoy and
270bp qoq at 21.8% led by stellar performance from the US on the back of new
launches and ramp up in market share gains for HCQS. Sustained margin
performance in the past 5 quarters is driven by new launches in the US, better
rupee realization and recovery in India formulations. The management has
guided for 1% improvement in margins over the next 3 years subject to approvals
from USFDA. Given the management’s guidance for continuous presence of
sizeable AG sales, we expect margins to improve by 100bp on an annual basis
from FY16E onwards. Further, the management expects to regain its historical
margin levels of 20-22% over the next 2-3 years as business improves.
May 15, 2015
P a g e |2
Institutional Equity Research
Cadila Healthcare
Pharmaceuticals | India
4QFY15 Result Update
Exhibit 2: Price hikes in key products leads to margin growth
23
170
22
21
140
19
(US$ mn)
(%)
20
110
18
17
80
16
15
50
4QFY14
1QFY15
2QFY15
USA
3QFY15
4QFY15
Consolidated OPM (%)
Source: Company, RSec Research
R&D to remain high at 6-7% of sales: In 4Q and FY15, Cadila reported R&D at
6.6% of sales, in-line with its guidance of 6-7% for the year. The expense largely
comprise of new filings and clinical trials for biosimilar pipeline. Cadila has one of
the largest biosimilar dedicated facilities in India and one of largest portfolio with
25 products. It is ahead of its peers (except Dr. Reddy’s) in development of
NBE/MBEs. This is a long term growth driver, which could play out over the next
few years. Innovative projects undertaken in India like Lipaglyn (NCE) exemplify
the company’s R&D capabilities. Geographical expansion of such projects can
lead to a re-rating of the entire business.
In the past three years, R&D spend has increased almost 2x and has increased
from 4.9% of sales in FY10 to 7.2% in FY13 and 6.6% in FY15. ~70-75% of the
R&D spend is on generics and the remaining 35% for innovation research, vaccine
and biologics development. We pencil in R&D expense to remain high at 7%+ over
the next few years. Cadila currently has 17 biosimilars and 3 novel products, 6
products in NCE pipeline (indications like oncology, RA, Gynecology and
Nephrology) and 14 NME molecules under its active pipeline at various phases.
Although, NME pipeline is in initial stages (mostly Phase-I and II trials), Cadila has
had some success through 6 biosimilar launches in India (complex proteins),
which when replicated in the EM could lead to peak potential sales of
~US$500mn.
Exhibit 3: R&D investments on a rise as share of complex and innovative filings
increase
60
8
50
7
6
30
(%)
40
5
20
4
10
US ANDA Filings
US ANDA approvals
FY15
FY14
FY13
FY12
FY11
3
FY10
0
R&D expense (% of sales)
Source: Company, RSec Research
May 15, 2015
P a g e |3
Institutional Equity Research
Cadila Healthcare
Pharmaceuticals | India
4QFY15 Result Update
Domestic formulations: The domestic formulations business recorded ~9%
growth yoy for 4Q and FY15 each, marginally lower than our estimate. The
underlying growth was 12% for the quarter (adjusted for NLEM impact and
discontinuation of 2 in-licensed products from BI). The company has launched 55
new products in India in FY15 including line extensions and 19 first time launches
(includes Exemptia). The management reiterates its guidance of launching ~20
products per quarter in the domestic market. Improving productivity and
maintaining pace of new launches remain crucial for the company.
Domestic formulations have remained muted in single-digit for the past 7-8
quarters impacted by new pricing policy and discontinuation of 2 in-licensed
products. However, the gap is narrowing since the company has launched its own
brands replacing the in-licensed products. Management has guided for doubledigit growth from FY16E onwards with ~5,000MRs. We forecast ~15% CAGR
over FY15-17E for Indian formulations.
Exhibit 4: India remains constant in past 7 quarters, expect rebound in FY16E
7,500
11
6,000
(%)
(Rs mn)
9
4,500
7
3,000
1,500
5
4QFY14
1QFY15
2QFY15
Domestic Formulations
3QFY15
4QFY15
% Ch. YoY
Source: Company, RSec Research
US generic business: Cadila’s US subsidiary posted 44.3% yoy growth (37% yoy
growth in US$ terms) during the quarter and 56.3% yoy growth in FY15. The
growth was led by a ramp up in market share of key products including HCQS.
Average market share in HCQS pepped up to 38% from 16% on a sequential
basis. Cadila gained from shortage in HCQS post exit of Ipca/ Ranbaxy in June
2014 and remains confident of maintaning its market share and pricing in the
product.
The management has received 2 Complete Response Letters (CRL) from the
USFDA and has guided to launch 2 products in the Transdermal category in
2HFY16E, which, we believe, is highly positive. FY16E should see launch of
Transdermals, Nasals, Asacol HD, Namenda and Abilify thereby improving
growth visibility for the next 2 years. It remains confident of monetizing Lialda in
CY15. The management guided for 20% growth in the US subject to approvals.
We are excited by the portfolio mix shift towards complex generics for Cadila. The
portfolio mix has shifted towards low competition products with expected launch
of nasal sprays, controlled substances (Nesher portfolio; as consent decree is
expected to be resolved by FY16E), transdermals (expect 2 launches in
May 15, 2015
P a g e |4
Institutional Equity Research
Cadila Healthcare
Pharmaceuticals | India
4QFY15 Result Update
2HFY16E) and vaccines (intend to make Lipaglyn a mega brand). Beyond these,
there are relatively low competition opportunities for Cadila over the next two
years. These opportunities, if realized, would ensure a healthy double-digit
growth in the US on a low base.
Our US sales expects upside from 2 transdermal patch launches and 1 nasal
spray launch in FY16E. However, the portfolio has the potential to ramp up to
US$150mn by FY18E, in our view. Launches from injectables and controlled
substances will add strength to base business. We estimate the US business to
grow at 28% CAGR over FY15-17E as growth bunches up in FY16/17E.
ANDA filings: The company has filed 38 ANDAs in FY15 (40 guided in FY16E50% in complex space) and believes that if the filing rate is sustainable then 1015 approvals annually are possible. With 8 launches in FY15, we expect bunched
up approvals and launches (~20) in FY16E. During the quarter, the company filed
6 ANDAs and launched 3 products. It currently has 260 filings, 99 approved and
161 ANDAs pending for approval, which includes 5 in nasal spray and 3 in the
transdermal category.
The management indicated that they received complete response letters for its
key complex filings and is confident of monetizing these opportunities, although
the timeline is uncertain at the moment. Given the healthy pipeline and focus on
limited-competition opportunities, we remain positively biased on the monetization
of the same.
Exhibit 5: US continues healthy show through products in base portfolio
170
90
150
1100
55
900
45
700
35
500
25
300
15
70
50
(US$mn)
110
(%)
(US$mn)
130
90
30
70
50
10
4QFY14
1QFY15
2QFY15
USA
3QFY15
% Ch. YoY
4QFY15
100
5
FY13
FY14AR
USA
FY15
FY16E
FY17E
% yoy change
Source: Company, RSec Research
May 15, 2015
P a g e |5
Institutional Equity Research
Cadila Healthcare
Pharmaceuticals | India
4QFY15 Result Update
JVs: The JVs collectively posted growth of ~5% yoy in 4Q and FY15 each,
despite a lower base. The management has guided for sustainable growth going
ahead. However, we remain skeptical of the potential scale-up due to lack of
meaningful pipeline launches from Hospira.
Exhibit 6: Segment-wise sales performance
(Rs mn)
Domestic
Formulations
APIs
4QFY15
4QFY14
% yoy
3QFY15
% qoq
FY15
FY14
% yoy
8,940
8,136
9.9
8,463
5.6
35,347
32,445
8.9
6,797
6,247
8.8
6,418
5.9
26,772
24,644
8.6
206
209
(1.4)
225
(8.4)
928
640
45.0
1,937
1,680
15.3
1,820
6.4
7,647
7,161
6.8
15,195
12,494
21.6
14,733
3.1
51,230
39,638
29.2
13,362
10,652
25.4
12,782
4.5
43,731
32,282
35.5
JVs
1,169
1,111
5.2
1,217
(3.9)
4,704
4,499
4.6
APIs
664
731
(9.2)
734
(9.5)
2,795
2,857
(2.2)
24,135
20,630
17.0
23,196
4.0
86,577
72,083
20.1
Cons& others
Exports
Formulations
Total Gross Sales
Source: Company, RSec Research
Other markets: Emerging markets seems to be in a gestation period posting 8%
yoy growth in 4Q and 11% in FY15 on the back of low base and high sales from
South Africa. The company has made total 54 launches in emerging markets till
date.
Europe continue to struggle with 12.4% de-growth yoy (down 12.6% qoq) as
there have been no improvement in pricing environment. Besides, channel
rationalization in Europe and lack of new approvals in Brazil contributed to dismal
performance.
Cadila filed 10 dossiers in Brazil (cumulative 125 dossier filings), launched 3
products (cumulative 15 launches) and launched 7 products in Mexico
(cumulative 15 launches) in FY15. Increasing launches from France (launched 5
products), Spain (launched 12 products), Sudan and Philippines will continue to
provide an upside to this geography.
Other Highlights

Bremer Pharma successfully completed the regulatory audit

JV’s also cleared ISO-OSO inspection

Ahmedabad 483: No update from the USFDA. Cadila has not done any derisking strategy for the filings given that it has only single digit DMFs filed
from the facility.
May 15, 2015
P a g e |6
Institutional Equity Research
Cadila Healthcare
Pharmaceuticals | India
4QFY15 Result Update
Profit & Loss Statement
Y/E March (Rs mn)
Net Sales
FY14
71,150
FY15
84,971
FY16E
102,711
FY17E
119,831
Total Expenditure
60,168
68,672
82,261
94,541
Cost of Materials
27,065
31,867
38,003
43,738
Personnel
10,711
12,085
13,958
16,052
Others
22,392
24,721
30,300
34,751
EBITDA
10,982
16,299
20,450
25,289
% chg
10.9
48.4
25.5
23.7
(% of Net Sales)
15.4
19.2
19.9
21.1
Depreciation& Amortization
2,012
2,873
3,416
3,933
EBIT
8,969
13,426
17,034
21,356
% chg
11.1
49.7
26.9
25.4
(% of Net Sales)
12.6
15.8
16.6
17.8
Interest & other Charges
1,181
613
744
804
Other Income
1,941
2,096
1,776
1,724
(% of PBT)
Recurring PBT
20.0
14.1
9.8
7.7
9,729
14,910
18,066
22,266
11.3
53.2
21.2
23.2
PBT (reported)
9,729
14,910
18,066
22,256
Tax
% chg
1,060
2,594
3,252
4,010
(% of PBT)
10.9
17.4
18.0
18.0
Minority Interest
326
377
452
542
8,343
11,939
14,362
17,704
% chg
16.1
43.1
20.3
23.3
Less: Extraordinary item(EI)
307
433
-
-
Adjusted PAT
8,036
11,506
14,362
17,704
% chg
23.0
43.2
24.8
23.3
(% of Net Sales)
11.3
13.5
14.0
14.8
Adjusted EPS (Rs)
40.7
58.3
70.1
86.5
% chg
16.1
43.1
20.3
23.3
FY14
FY15
FY16E
Reported PAT
Balance Sheet
Y/E March (Rs mn)
FY17E
SOURCES OF FUNDS
Equity Share Capital
1,024
1,024
1,024
1,024
Reserves& Surplus
33,366
41,492
52,833
67,536
Shareholders’ Funds
34,390
42,515
53,857
68,560
1,443
1,689
2,141
2,683
Total Loans
22,646
23,340
22,540
21,740
Total Liabilities
58,479
67,544
78,537
92,982
Gross Block
39,290
42,445
47,445
52,445
Less: Acc. Depreciation
15,402
18,275
21,691
25,624
Net Block
23,888
24,170
25,754
26,821
Capital Work-in-Progress
8,915
10,000
12,000
12,000
Goodwill on consolidation
7,350
7,331
7,331
7,331
866
1,544
1,544
1,544
38,846
47,426
57,732
73,654
Cash
5,488
6,699
8,986
17,886
Loans & Advances
7,660
8,780
10,613
12,381
Current liabilities
20,425
22,342
25,238
27,782
Net Current Assets
18,421
25,085
32,494
45,872
(961)
(586)
(586)
(586)
58,479
67,544
78,537
92,982
Minority Interest
Investments
Current Assets
Net Deferred Tax
Total Assets
May 15, 2015
P a g e |7
Institutional Equity Research
Cadila Healthcare
Pharmaceuticals | India
4QFY15 Result Update
Cash Flow Statement
Y/E March (Rs mn)
Profit before tax
FY14
9,729
FY15
14,910
FY16E
18,066
FY17E
22,276
Depreciation
2,012
2,873
3,416
3,933
Interest Provided
1,181
613
744
804
964
(5,432)
(5,122)
(4,479)
(1,060)
(2,594)
(3,252)
(4,010)
(118)
(1,301)
-
-
Cash Flow from Operations
12,708
9,069
13,852
18,525
(Inc.)/ Dec. in Fixed Assets
(5,000)
Change in Working Capital
Tax Paid
Others
(5,705)
(4,240)
(7,000)
(Inc.)/ Dec. in Investments
279
(678)
-
-
Cash Flow from Investing
(5,426)
(4,918)
(7,000)
(5,000)
-
(0)
-
-
Inc./(Dec.) in loans
(4,185)
694
(800)
(800)
Dividend Paid (Incl. Tax)
(2,266)
(3,021)
(3,021)
(3,021)
Interest Provided
(1,181)
(613)
(744)
(804)
Cash Flow from Financing
(7,632)
(2,940)
(4,565)
(4,625)
Inc./(Dec.) in Cash
(350)
1,211
2,287
8,900
Opening Cash balances
5,838
5,488
6,699
8,986
Closing Cash balances
5,488
6,699
8,986
17,886
FY14
FY15
FY16E
FY17E
P/E (on FDEPS)
41.5
29.0
24.1
19.5
P/CEPS
33.4
23.3
19.5
16.0
P/BV
10.1
8.1
6.4
5.0
Dividend yield (%)
0.5
0.7
0.7
0.7
EV/Sales
5.1
4.3
3.5
2.9
33.1
22.2
17.6
13.8
6.1
5.3
4.5
3.7
EPS (Basic)
40.7
58.3
70.1
86.6
EPS (fully diluted)
40.7
58.3
70.1
86.6
Cash EPS
50.6
72.3
86.8
105.8
Issue of Equity
Key Ratios
Y/E March
Valuation Ratio (x)
EV/EBITDA
EV / Total Assets
Per Share Data (Rs)
9.0
12.0
12.0
12.0
167.9
207.7
263.0
334.9
RoCE
18.4
22.8
23.8
24.7
RoIC
14.0
17.5
18.2
18.9
RoE
24.3
28.1
26.7
25.9
Asset Turnover (Gross Block)
1.2
1.2
1.3
1.3
Inventory / Sales (days)
70
66
67
65
Receivables (days)
58
68
66
65
102
94
91
89
66
79
84
85
DPS
Book Value
Returns (%)
Turnover ratios (x)
Payables (days)
Working capital cycle (days)
May 15, 2015
P a g e |8
Cadila Healthcare
Institutional Equity Research
Pharmaceuticals | India
4QFY15 Result Update
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May 15, 2015
P a g e |9