Cadila Healthcare: Outperform (CLSA)

[Rajesh Desai]

 

Cadila Healthcare: Shot in the arm; CMP Rs.430, TP Rs.480; Outperform (CLSA)

Moraiya outcome a big surprise but approvals may take time

 

Cadila announced that its key plant ‘Moraiya’ received no observations

from the US FDA in its recent inspection. Moraiya has ~60 of the 200

ANDAs pending approval including some critical ones, which were stalled

due to the warning letter received in Dec-15. We were expecting a

resolution by Sept-17. There will be an expectation of quick approvals but

history suggests that there is a lag between successful plant clearance

and the approval cycle. The near-term outlook is challenging due to weak

US sales and high R&D spend. We believe the benefit of Moraiya’s

clearance will be more visible in FY19 versus FY18 and raise FY18-19CL

EPS by 3-9%. We increase our TP to Rs480 (from Rs390). Maintain O-PF.

 

Moraiya plant re-inspected with zero observations

Cadila announced that its key plant ‘Moraiya’ received no observations from the US

FDA in its recent inspection. Moraiya has ~60 of the 200 ANDAs awaiting approval

including some critical ones, but those were stalled due to the warning letter

received in Dec-15. Toprol XL (US$266m), Prevacid ODT (US$223m), Asacol HD

(US$466m) amongst oral solids, select transdermal and nasal products are the key

pending approvals from Moraiya.

 

Lag between plant clearance and approvals

We were expecting Moraiya issues to get resolved by Sept-17 and today’s

development is a positive surprise. There will be an expectation of quick approvals

but history suggests that there is a lag between successful plant clearance and the

approval cycle. In FY12-13 there was an expectation of a strong pickup in

approvals post clearance of a warning letter for Moraiya. However, that did not

happen and led to earnings disappointment. We believe the benefit of Moraiya’s

clearance will be more visible in FY19 versus FY18.

 

Cadila news may lift sentiment for the sector

Indian pharma has been facing the overhang of US FDA issues for over two years

with key companies receiving a warning letter/import alert for critical sites. An

inability to resolve the issues swiftly has been one of the key reasons for the

derating of the sector. We expect investor interest to return once more companies

resolve US FDA issues.

 

Increase FY18-19CL EPS by 3-9%, maintain O-PF

Post today’s development, we increase our FY18-19 US sales estimates by 4-10%,

which results in a 3-9% increase in FY18-19CL EPS. We increase our target price to

Rs480 (from Rs390). We caution that approvals may not come immediately and

that the near-term outlook is challenging.

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