Thursday, November 3, 2011

Buy Zydus Cadila Healthcare (ZCH) – Ready to fire on all cylinders

Buy Zydus Cadila Healthcare (ZCH)  –  Ready to fire on all cylinders

Cadila healthcare, over the years has carefully crafted its presence in select areas in the healthcare sector (Pharmaceuticals, OTC, Animal Health) which are poised to deliver super normal growth and yet in the process has not lost focus.  It has planted various seeds, which are in different stages of evolution. 

In order to maintain the growth rate on a growing base, it has fully leveraged its existing positioning (strong market  penetration, product portfolio and regulatory capabilities) to attract the best of  JV partners (Bayer, Bharat Serum, Hospira, Nycomed, Abott) and enter into the newer geographies that offer solid growth prospects (Japan, Mexico, South Africa).  It has also  made several acquisitions and also executed them flawlessly. 

Cadila understands that the generic space is extremely competitive and constant evolution is the survival mantra. Cadila has set a trajectory for itself, so as to evolve from a generic player to a innovation driven company.  From a current strong position in oral solid formulation, it is slowly charting its way to enter into the more complex generic space (injectable, respiratory, transdermal,  topicals and biologics) and finally intends to get into new molecular entities (me-too to novel mechanisms). Cadila has laid the foundation to move on this trajectory.

Over the next few years, Cadila will deliver EPS growth in the mid twenties range, as all business segments (domestic formulations, export formulations, API, OTC, Animal health) are well placed in a favorable macro environment to deliver solid growth.

Domestic Formulation Business – Well Poised to grow
The domestic formulation business should grow in the high teens over the next four years driven by an expanded reach (both in terms of products and doctors), Cadila presence in the fast growing disease segments and an expansion of the field force.
In 2010-11, Cadila has added 10,000 new doctors to its coverage, 400 Medical representatives to its field force and has also launched 60 new products and by virtue of such efforts Cadila continues to gain market share in the Indian pharmaceutical market which is growing at mid teens.
Cadila derives about 57% of its sale from chronic segments and the chronic disease segment in India is growing at high teens, while Cadila is growing even faster than the market, driven by its leadership position in the GI, Gynecology and cardiovascular space which are among the fastest growing segment in the Indian pharmaceutical market.

Apart from growth driven from its own product portfolio, the JV with Bayer will also start contributing this year. The JV has a sales force of 500 and is likely to be increased to 800.

International Formulation Business – A strong ANDA pipeline

The International formulation business is likely to grow by around 30%s over the next  2 years, while growth  should slow down going forward as the patent expiries dry up.
Cadila has a strong ANDA pipeline of 130 filings of which 65 have been approved, while 40 products have been launched. Over the next two years, we will see the most painful patent expiries, as products worth $40b in global sales will lose patent protection, and this will be a bonanza for the generic companies.  Although the ANDA’s are not disclosed, but half of these ANDA’s are going to be backed up by its own API, hence a look at the DMF filing for the company suggests, Cadila is likely to be participating in majority of the major patent expiries around the corner (Diovan -$5b, Actos - $3b, Seroquel - $4.5b, Plavix - $9b, Lipitor-$10b, Avapro-$1b, Xeloda -$1b, Effexor XR,  Abilify - $4b, Clarinex).

The ANDA filing by Cadila has a reasonable component of Nasals and parenterals. They have about 5 Nasal and 18 ANDA’s for parenterals. These markets are usually less competitive and hence have higher margins.

Beyond the US business, we are seeing encouraging trend in the Japan generic business  as we have see a encouraging environment, with  a number of companies having started receiving approvals for API’s and formulations. Cadila was the first Indian company to receive approval for selling a formulation (amoldipine) in Japan that has been manufactured in India.

In Brazil, Cadila intends to do 8 to 10 new launches every year, which should be driven by registering its own products and acquiring new products.

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