Cadila Healthcare's Dabhasa Plant Clears USFDA Inspection

Cadila Healthcare reported that its Dabhasa plant has cleared a USFDA audit with zero observations. Dabhasa is an API plant, which is located near Vadodara. This plant was earlier cleared by the Mexican health authority (COFEPRIS) as per its conference call in August 2017.

Last year, Cadila received approval to its Moraiya facility, which is very critical for its pipeline monetization and future growth. We believe that clearance to another plant is a positive news on this counter. While the facility approvals are positive, competition in the US market is expected to put pressure on margins in FY19E. The stock currently trades at a rich valuation (23x of FY19E EPS).

Cadila Healthcare is currently trading at Rs447.15, up by Rs11.05 or 2.53% from its previous closing of Rs436.1 on the BSE.

Cadila Healthcare is a fully-integrated, pharmaceutical company with strong presence in the formulations and CRAMS businesses globally. Its formulations business spans India, US, Europe and emerging markets (mainly Brazil and South Africa). The company derived 34% and 41% revenues from India and the US, respectively in FY17.

Shire, an Irish drug maker recently launched an Authorized Generic (AG) version of Lialda. This is a material negative for Cadila, as it manufactured the sole generic for Lialda so far. The AG launch may not mean so much for market share loss, but will definitely put downward pressure on pricing. Therefore, the product may not remain as attractive for Cadila as it would have been in a two-player market. Due to this we expect Lialda revenue to dampen by ~Rs.65cr to ~Rs.98cr over FY17-19E. The company expects ~30 ANDA approvals from Moraiya and ~10 from other facilities, which will boost US sales. Trademark acquisitions from Astrazeneca for products in gynaecology, anaesthesia and anti-infectives are expected to drive Indian formulation business. Overall, we expect revenue CAGR of ~11% with EBITDA margin expansion of 290bps to 23% over FY17-19E. Further considering increasing effective tax rate we expect PAT CAGR of ~5% over FY17-19E.
 
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