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Strategic reprioritizing led to the divestment of the Animal Health business

* CDH has entered into an agreement to divest its Animal Healthcare Established Markets business for INR29.2b (USD398m) on a slump sale basis.

* As part of its strategic re-evaluation, it has decided to focus on scaling up its India human health/consumer health, US generics, specialty segment comprising new chemical entity (NCE)/biological/vaccines, and emerging market business.

* While the deal is expected to be EPS neutral, we raise our FY22E/FY23E earnings estimate by 4% each to factor in its recent strong performance in the Domestic Formulations (DF) business, partly aided by COVID-19 products such as Remdesivir.

* We value CDH at 25x 12-month forward earnings to arrive at our TP of INR750. The vaccine opportunity and traction in the recently approved COVID-19 treatment drug (Virafin) are near term triggers and are yet to be factored into our model. Maintain Buy.

Deal to reduce debt over the near term, enable it to build a war chest for strategic opportunities

* CDH’s sale of its Animal Healthcare Established Market business would fetch INR29.2b on a slump sale basis. This business had FY21 sales of INR6b (+17% YoY) and EBITDA margin of 25% (+800bp YoY). This implies EV/sales of 5x and EV/EBITDA of ~19x. The valuation is decent considering its leadership positions across various therapies covering most animal species of livestock and poultry.

* CDH had built its Animal Healthcare business through organic as well as inorganic means. It had acquired Zoetus’ Animal Healthcare business with a turnover of INR1.7b in FY16 and acquired its Haridwar manufacturing unit. The deal does not include the Animal Healthcare Regulated Market business, which will focus on the Companion Animal segment in the US and Europe. This business is in the investment stage and will take 5-6 years to fully develop. The management intends to continue to file ANDAs in the Animal Healthcare Regulated Market business.

* As a result of the deal, CDH’s net debt will reduce to less than INR10b over the short term. It will use the deal proceeds to make investments in its focus business segments.

DF on a strong footing buoyed by COVID-19 drugs/vaccines to some extent

* CDH delivered ~20% growth in the quarter-ending Apr’21, with 45% YoY growth in Apr’21, driven by chronic/COVID-19 drugs. Gastrointestinal/Pain Management therapies (14%/9% of sales) exhibited robust (21%/18%) growth in the quarter-ending Apr-21. Its Remdac brand (Remdesivir) has become the top brand in the DF segment. Priced at INR899/dose, its Remdesivir is 60-70% cheaper than any other Remdesivir brands in India, ensuring maximum accessibility during a national healthcare emergency.

* Last month, DCGI granted emergency use authorization to ‘Virafin’, technically referred to as Pegylated Interferon alpha-2b (PegIFN), used in the treatment of moderate COVID-19 infections. CDH is expected to initially supply 50,000 doses in the near term. By Jul’21, it would be able to scale-up monthly supplies to 1m doses. Considering the potential of the drug to reduce the need of supplemental oxygen and better efficacy against other viral infection, we expect sales of INR2.5-3b on an annualized basis.

* Its three-dose DNA vaccine candidate for COVID-19 is in Phase III trials and the company expected to seek emergency use authorization in India shortly. It has a capacity to produce 250m doses annually and may undertake further expansion if the need arises

Valuation and view:

* We raise our FY22E/FY23E EPS estimate by 4% each to factor in strong traction in the DF segment, better operating leverage due to restriction on travelling, and lower financial cost on account of a reduction in debt. We value CDH at 25x 12-month forward earnings to arrive at our TP of INR750.

* We remain positive on CDH on the back of superior growth in the Specialty segment of DF, strong ANDA pipeline, its NCE portfolio, building of the Biosimilars business, its complex generic portfolio, and better outlook in the Consumer Wellness segment.

* The vaccine and Virafin drug prospects may be additional triggers over the medium term. Maintain Buy.

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