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R&D on track for COVID 19vaccine/Niche Product Development

Cadila Healthcare Ltd (CDH) a fully integrated, global healthcare provider has strong capabilities across the pharma value chain- from formulations to APIs and animal healthcare products to wellness products.

DF on a strong footing:

CDH posted 9% YoY growth in the DF segment in FY21, with strong growth (15% YoY) in 4Q, led by the Specialty cluster of products which grew faster than the Mass cluster. In addition, we expect the COVID-19 portfolio to aid further growth in the DF segment. It has already launched products like Remdesivir, HCQs, and Pegylated interferon used for treating patients detected with COVID-19. It also has a marketing agreement for Liposomal Amphotericin B. It is in advanced stage of Phase III clinical trials, with the data to be submitted to the regulatory authority for its COVID-19 vaccine. CDH now has one of the strongest COVID-19 portfolios in India, which will propel the domestic business in the short run. Considering the aforementioned factors, we expect CDH to post 18% CAGR in DF revenue to INR56b over FY21-23E.

COVID-19 vaccine- A shot in the arm:

Trials have been conducted on a three-dose regimen and pricing is expected to be affordable for its vaccine. The trial includes 1,000 children (12-18 years) and hence could be one of the first to be approved for children. It is also working out a plan to test its vaccine for children aged 5-12 years. CDH would seek emergency use approval for its COVID-19 vaccine in next 2 weeks and would initially begin a vaccine supply rate of 10m doses/month which is expected to increase to 30-40m after 4-6 months, with partnerships/ capacity expansion. It is also developing another vaccine candidate, which is in nascent stages currently. Vaccine sales could meaningfully elevate DF segment sales and provide further upside to our estimates.

US pipeline build-up progressing well:

CDH has been able to maintain its market share in US, despite lower offtake of its key product g-Asacol and expects sales to normalize from 2QFY22 onwards. It launched 30 ANDAs in FY21 while new approvals/filings stood at 35/22. It is expected to sustain the launch pace in FY22 as well. It expects to launch one complex injectable in US shortly. We expect US business to post 7% sales CAGR over FY21-23E. Meaningful benefits from innovative portfolio are expected beyond FY23E.

Strategic reprioritizing led to divestment of Animal Health business:

As part of its strategic re-evaluation, CDH has entered into an agreement to divest its Animal Healthcare business for INR29.2b (USD398m) on a slump sale basis to focus on scaling up its India human health, US generics, specialty segment, and emerging market business. The valuation is considered decent at EV/sales of 5x and EV/EBITDA of ~19x given its leadership positions across various therapies covering most animal species of livestock and poultry. As a result of the deal, CDH’s net debt will reduce to less than INR10b over the short term and will use the deal proceeds to make investments in its focus business segments

Valuation and view:

We remain positive on CDH on account of: a) superior execution in DF segment, b) favorable demand for COVID-19 products, c) innovative/Complex Generic pipeline, and c) reducing financial leverage. We expect 15% earnings CAGR on the back of 7% sales CAGR in US (vis-a-vis 3% YoY growth in FY21), 18% sales CAGR in DF (considering muted growth in FY21), 18% sales CAGR in EMs supported by 180bp margin expansion, and reduced financial leverage. Vaccine-related upside is yet to be captured in the earnings. Maintain Buy with TP of INR740 (26x FY22E earnings).

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