Cadila Healthcare’s 4Q was ahead of estimates by 10% at the operating level, driven by higher royalty income in the quarter. Though there is limited clarity on FY14 US launches, Nomura believes FY15 launches are likely to be significant enough to drive margins

CDH’s (Cadila Healthcare) 4Q was ahead of Nomura’s estimates by 10% at the operating level, driven largely by higher royalty income in the quarter. Gross margins remain under pressure due to a price drop in the US market and higher contribution from Authorised generic sales, said Nomura Equity Research in its Quick Note on the company’s fourth quarter performance.

EBITDA margin at 18.6% in FY13 dropped 301 bps (basis points) y-o-y and is the lowest in many years. US approvals remain the most important factor driving margins. There is limited visibility on interesting US launches in FY14. Therefore, most of the margin expansion is expected in FY15 when most of the interesting approvals are expected to contribute.
 

The management’s guidance of a 15% effective tax rate (versus 25%-30% earlier) to an extent negates the risk of slippage in the US, said Nomura. “We are currently reviewing our earnings estimates. On our current estimates, the stock is trading at 18.6x FY14F and 16x FY15F EPS, a 0-25% discount to other generic companies, which we believe is justified given near-term earnings risk. We remain Neutral,” the brokerage added.

Cadila Healthcare reported sales at Rs15.6 billion, a growth of 16.5% y-o-y, 1.6% ahead of Nomura’s expectation. Gross margins were the lowest in the past 28 quarters, declining 367 bps y-o-y. Gross margin was under pressure due to pricing erosion in the base US business, price erosion in Taxotere and higher contribution from authorised generics sales. However, employee cost and other expenses were lower than our estimate and as a result EBITDA margins were in line with estimates, said Nomura. Net earnings were boosted by a tax write-back.

For the quarter, EM and Europe recorded 86% and 36% growth y-o-y, respectively. The growth in Europe was driven by France and Spain. EM growth was driven by countries in Asia-Pacific and Africa, as per company. US revenues declined 1% q-o-q due to lack of any meaningful launches. For FY13, CDH launched only seven new products, including one product from Nesher. Japan revenues in rupee terms were under pressure due to yen depreciation, with sales growth at 3.7% y-o-y. India formulation growth at 14.4% was largely in line with expectations, the brokerage said.

High-value launches in the US are critical for margin expansion. However, the developments in the recent past and management commentary fail to provide clarity on such launches in the near term.

CDH has so far filed 173 ANDAs, with 97 awaiting approvals. CDH filed an impressive 33 ANDAs in FY13, which include eight injectables, two topical (the first of derma filings) and the third transdermal. The pipeline presents some interesting product opportunities, but there is limited clarity of upside being realised in FY14, believes Nomura.

CDH lost a district court case on Prevacid, which was the potential low competition opportunity near term. The hearing date for Lialda is yet to be decided. There is limited visibility on other important products such as Asacol, Toprol XL, nasal sprays and transdermals at this stage. The nasal spray facility was inspected by the USFDA last year and the transdermal facility will likely be inspected next quarter. The management suggests most of the upside will be realised at best towards the end of FY14. The company has guided for 22 approvals in FY14 (with two from Nesher) and expects moderate growth of 20% y-o-y.

 Nomura expects the new price ceiling for products under NLEM (National List of Essential Medicine) to be announced soon. According to the management, the overall impact of the pricing control is estimated at 2.5% of domestic sales. The implementation could also lead to some destocking by the channel on the impacted products, thereby slowing growth in 1QFY14. New product launch momentum has been maintained, as the company launched 90 new products in India versus 92 last year. The number of first-time launches was 21 against 29 in FY12.

Brazil and Mexico have been categorised as home markets by CDH and hold long-term potential. However, the approval pace in Brazil has slowed, adversely impacting growth. The company has 100 filings in Brazil, with 18 new dossiers filed in FY13. The company has obtained three new approvals in Mexico and is planning commercial launch in 2QFY14. Overall, 20 dossiers have been filed in Mexico, of which six were filed in FY13, according to Nomura.

Consumer business recorded healthy growth of 26% y-o-y, maintaining the growth momentum of the previous quarter. The growth was driven by Sugar Free, which has now started to grow in double digits, according to the management. The company has maintained its guidance of consumer business sales reaching Rs5 billion in FY14.

JV sales at Rs1.15 billion recorded a muted 1.1% growth y-o-y. Pricing pressure in Taxotere in the Hospira JV has adversely impacted growth and more importantly margins, according to Nomura. The Hospira JV collaboration has been expanded for 12 additional products, of which site transfer has already taken place for three (two for US and one for EU). These additional products will drive volume growth, though may not add to margins, stated the brokerage. The Nycomed JV has expanded to three more APIs. Overall, the management believes that JV sales will deliver growth in FY14 on a low base.

EBITDA margin for FY13 at 18.6% (Q4 margin at 16%) was the lowest in many years, and declined 301 bps y-o-y. Nomura expects improvement in margins from here on, driven by new launches in the US, Prisim 2 initiatives to control costs and improvement in margins in countries such as France and Spain. Clearly, US approvals is the most important factor.

Though there is limited clarity on FY14 US launches, Nomura believes FY15 launches are likely to be significant enough to drive margins.

The management expects an effective tax rate at 15% going forward (including MAT credit) compared to 25%-30% guidance earlier. The capex for FY15 is estimated by the company at Rs6 billion (versus Rs7 billion in FY14), and is likely to come down thereafter.