The pharmaceutical sector has emerged as a lifesaver for investors in recent times. It is largely unaffected by ups and downs of the economy with predictability in earnings. More importantly, the market potential for generics (off-patent drugs in mostly developed markets) will unfold over the next five years as drugs worth $60 billion go off patent. Companies with good strategies will emerge successful and Cadila Healthcare could be one of them.
Cadila’s expansion in sales and marketing and the potential to become a prominent contract manufacturing player through its various joint ventures (JV) lend confidence. Its focus on key regulated markets outside India will give it good momentum in the generics business.
Business performance. Cadila’s sales and net profit have grown annually by 12.50 per cent and 14 per cent, respectively, over the last five years. Over 37 per cent of its revenue comes from exports, the US and Europe being major markets. During 2007-08, its income growth was mainly driven by the 72 per cent growth in formulations exports and 55 per cent in generics business of its French subsidiary. Recently, it hived off its consumer products business (7 per cent of turnover) and merged it with its subsidiary, Carnation Nutra Analogue. The business synergy may create long-term value for shareholders.
Profit margins were under pressure due to a weak dollar and high interest costs (up by 87 per cent in 2007-08). The dollar’s current strength is a positive factor.
While Cadila could continue to face pressure due to interest charges, its interest to EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio of 0.10 times is acceptable. It has a net debt of Rs 861 crore, of which 80-85 per cent is in foreign currency.
Growth triggers. Cadila’s acquisition plans will help build its generics business. Its acquisition, Nippon Universal Pharmaceutical, gives it a good entry in Japan, a market set to double to $5 billion in five years. US revenues may go up due to strong marketing and distribution tie-ups. In India, it plans to strengthen the position in therapeutic areas (nutraceuticals & orthopaedics) by increasing its field force and build on its diagnostics segment by enchancing marketing in hospitals.
In the contract manufacturing space (6 per cent of revenue) it has three main long-term supply contracts and over 26 smaller ones that could be worth Rs 172 crore annually. But, its JV with Nycomed (Switzerland), after the launch of generics alternative of Pantoprazole (gastro-intestinal drug) in the US, had faced pressure in 2007-08. To ensure no further impact, Nycomed is transferring production of active pharmaceutical ingredients (API) to India (a low-cost destination) for 17 products. This is likely to start contributing to the revenues from 2009-10. Revenues from JV Hospira (to be operational this fiscal) will make up partially for this shortfall. Once the JV Bharat Serums & Vaccines’s cancer drug is launched in other markets, a good revenue inflow can be expected.
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