About the Company

Zydus Cadila is a leading Indian Pharmaceutical company and a fully integrated, global healthcare products manufacturer. From formulations to active pharmaceutical ingredients and animal healthcare products to wellness products, Zydus has earned a reputation amongst Indian pharmaceutical companies for providing comprehensive and complete healthcare solutions. From a humble turnover Rs. 250 crores in 1995, the group witnessed significant financial growth and registered a turnover of over Rs. 12,700 crores in FY19.

Q2FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 2118 1961 8.01% 1816 16.63% 3934 3244 21.27%
PBT 561 617 -9.08% 478 17.36% 1040 642 61.99%
PAT 473 554 -14.62% 398 18.84% 871 580 50.17%

 

Consolidated Financials (In Crs)
  Q2FY21 Q2FY20 YoY % Q1FY21 QoQ % H1FY21 H1FY20 YoY
Sales 3848 3394 13.38% 3662 5.08% 7510 6912 8.65%
PBT 534* 122** 337.70% 593 -9.95% 1128* 516*** 118.60%
PAT 473 107 342.06% 454 4.19% 927 411 125.55%

*Includes an exceptional item of Rs 132 Cr which is for premium on NCDs purchased by Group.

** Includes an exceptional item of Rs 268 Cr which is an impairment charge on ‘Levorphanol’.

*** Includes an exceptional item of Rs 305 Cr.

Detailed Results

  1. Consolidated revenues were up with 13% YoY growth. Profit has risen over 3 times YoY in Q2 due to exceptional items recognized in both Q2FY21 & Q2FY20.
  2. The EBITDA for the quarter was at Rs 863 Cr which was up 36% YoY with EBITDA margins of 22.6%, an improvement of 370 bps YoY.
  3. Consolidated PAT excluding exceptional items was up 73% YoY.
  4. The company reduced net debt by Rs 2709 Cr in H1, which is a 40% reduction since March 2020. Net Debt as of 30th Sep 2020 stands at Rs 4031 Cr.
  5. India revenues were at Rs 1583 Cr in Q1 which was up 11% YoY. The Company gained market share in Gynaecology, Pain management, Anti-Infectives, Anti-Diabetic, and Hormones portfolio in Q2 vs last year. Animal Health business saw revenues of Rs 161 Cr in Q2 which is a growth of 20% YoY.
  6. US revenues were up 18% YoY to Rs 1709 Cr. The company received approval for 10 new products (incl. 2 tentative approvals) and filed 5 additional ANDAs in Q2.
  7. Cadila received final approval for ANDA for Liposomal Doxorubicin injection in Q2.
  8. The Phase II clinical trials of Desidustat in the management of COVID 19 are underway in Mexico.
  9. The Company has also completed Phase II clinical trials of Pegylated Interferon Alpha-2b in India for management of COVID 19.
  10. The Adaptive Phase I/II clinical trials are underway for the Company’s lead vaccine candidate ZyCoV-D.

Investor Conference Call Highlights

  1. The US generics business grew by 21% YoY driven by volume expansion.
  2. The company’s emerging markets business grew by 8% YoY and saw sales of Rs 236 Cr. IN constant currency terms, this business grew 12% YoY.
  3. The India Consumer Wellness business grew by 9.3% YoY.
  4. The company completed QIP for Rs 1000 Cr in Q2 which was oversubscribed 3 times. Proceeds of the issue were used for redemption of nonconvertible debentures leverage to the balance sheet.
  5. US formulations business remains the largest contributor to the consolidated revenues with a 45% share in total revenues in Q2.
  6. API business saw sales of Rs 160 Cr and growth of 52% YoY.
  7. The company is about to complete preclinical development for ZYIL 1, a small molecule NCE positioned for the management of critically ill COVID-19 patients.
  8. The company has received regulatory permissions in India to conduct a Phase II clinical trial of adalimumab for COVID-19.
  9. The company completed Phase I trials for the Hepatitis E vaccine and has received regulatory permission to conduct preclinical tox studies for one more vaccine during the quarter.
  10. The management attributes the growth in India’s business in Q2 to the growth in the chronic portfolio.
  11. The company is still not completely back in terms of its marketing activities and there can be some increase in marketing going forward. But overall, fixed expenses are back to normal.
  12. The company continues to hold a good market share in Lialda due to the complexity of molecules and the sourcing of materials.
  13. Pricing in the base business is expected to remain stable at current levels.
  14. Other than Saroglitazar, the company hopes to maintain R&D at 7-8% of revenues in FY21.
  15. Generic growth in India has been muted in Q2.
  16. The animal health business has done well due to the strong brand presence, customer outreach, and the revival of the rural economy in India. The company also saw better margins in this business due to a favourable product mix.
  17. The management expects APIs to grow >10% going forward.
  18. The company will not receive any export benefits due to the discontinuation of the previous export incentive scheme and it is waiting for the details of the new scheme to gauge how the incentives will come in for it.
  19. There are a number of Remdesivir providers in India but Cadila remains the lowest-priced provider in the market. The company is still building for full capacity and aims to produce as much as it can sell.
  20. The company’s COVID vaccine is expected to come out by April if Phase III trials are completed in time.
  21. The management has stated that compared to the Pfizer or any other vaccine, the company COVID vaccine has a few advantages like:
    1. It doesn’t use an infectious agent as a platform for delivery so safety is enhanced.
    2. DNA vaccines have a very clear pathway that lies within WHO & USFDA guidelines.
    3. It has a highly scalable platform which makes it easy to build for scale and find third-party manufacturers.
    4. The product is stable at 2-8 degrees Celsius which is very convenient in terms of cold chain logistics and shelf life.
    5. It has an intradermal application which should be a much easier administration.
  22. The company has increased its capacity for DNA vaccines by 70%. This whole new capacity can be used to make only 1 vaccine at a time.
  23. The hasn’t been any shortage in demand for Remdesivir despite the WHO comments as the USFDA has shifted it to first-line treatment now instead of emergency and this drug remains the only line of treatment for moderate to severe patients.
  24. The competition for Lialda is low as the majority of the mesalamine franchisees are very difficult to develop and these are very complex products to continuously manufacture.
  25. The competition in the Tamiflu space is intense and the company stands ready for large quantities as demand is expected to be high due to COVID-19.
  26. The management believes that the company has outperformed the market in all operating segments in H1.
  27. The management believes that with the company’s strong R&D, it can easily repurpose or bring new introductions whenever needed in the COVID portfolio when demand for it drops in the future.
  28. The company has set up an R&D engine that will be churning out first-in-India launches at affordable prices which should ensure adequate momentum for many years to come.
  29. The acute portfolio is the one where the company is struggling as the market is slow and the company is not a big player in this space.
  30. The management expects to see the current growth momentum for the domestic business to last at least 2 more quarters.
  31. The management has stated that the company needs at least 3-3.5 years to become a sizeable influence of $150-200 million in the injectables space.
  32. The company’s transdermal approvals are contingent on its Moraiya warning letter getting resolved. The company expects to see 5-6 approvals in this space. Once the approval is done, the company can set up this business in FY22 and see a good scale-up in the next 2.5 years.
  33. In the primary biliary cholangitis space, the company expects its drug to hit the markets in 2023 or 2024. This space has a big market size of a few billion dollars and has no approved products.
  34. The management has stated that it expects to keep the COVID-19 vaccine affordable as it is very scalable and can be made in high quantities easily.
  35. The company aims to file a total of 30-35 NDAs in FY21 and 40-45 NDAs in FY22

Analyst’s View

Zydus Cadila is one of the leading pharmaceutical and wellness product makers in the country. The company has done well to maintain good growth in the US generic business and see a resurgence in the India business, both of which are the biggest revenue generators for the company. The company is expected to benefit greatly from its targeted portfolio of products and services for COVID-19 especially from its COVID-19 vaccine which is touted to be more scalable and have better shelf life than the vaccine announced by Pfizer. It also has massive potential in the injectables business where the company is looking to add a number of its products in the near future. It remains to be seen what the future holds for the pharma industry with the race to COVID-19 vaccine intensifying. The company also has to resolve the Moraiya issue pending which can delay its plans for the expansion in the transdermal space. Nonetheless, given the strong positioning of the company in various pharma and consumer product categories and its ever-increasing specialty product portfolio, Zydus Cadila is an important stock to watch out for in the pharma space.

 


Q1FY21 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 1816 1283 41.54% 2212 -17.90%
PBT 478 25 1812.00% 693* -31.02%
PAT 398 16 2387.50% 607 -34.43%

 

Consolidated Financials (In Crs)
Q1FY21 Q1FY20 YoY % Q4FY20 QoQ %
Sales 3662 3519 4.06% 3796 -3.53%
PBT 593 394 50.51% 522* 13.60%
PAT 470 315 49.21% 414 13.53%

*Includes an exceptional item of Rs 52 Cr.

Detailed Results

    1. Consolidated revenues were up with only 4.06% YoY growth. Profit has risen 49% YoY in Q1.
    2. The EBITDA for the quarter was at Rs 815 Cr with EBITDA margins of 22.4%, an improvement of 360 bps YoY.
    3. India revenues were at Rs 1486 Cr in Q1.
    4. US revenues were up 19% YoY to Rs 1623 Cr. The company received 12 ANDA approvals and 4 are tentative.
    5. The Rest of the World business grew 8% YoY to Rs 238 Cr in Q1.
    6. The company has gotten USFDA approval to initiate clinical trials of Desidustat, its Investigational New Drug targeted at treating anaemia in cancer patients, receiving chemotherapy.
    7. The company received approvals from COFEPRIS of Mexico for clinical trials of Pegylated Interferon Alpha 2b in COVID 19 patients. At present, clinical trials in India and Mexico are underway with Pegylated Interferon alpha-2b.
    8. The company announced the commencement of the Adaptive Phase I/II clinical trials of ZYCoV-D, the preventive vaccine for COVID 19 in India.

Investor Conference Call Highlights

  1. The US generics business grew 25% YoY on the back of volume expansion and new product introductions.
  2. The company gained market share in gynaecology, pain management, and antidiabetic portfolios during Q1.
  3. In India human health business, sales were at Rs 532 Cr which was 12% down YoY, and profits were at Rs 89 Cr which was up 11% YoY.
  4. Animal health business in India saw modest revenue growth of 4% YoY to Rs 125 Cr.
  5. The company launched 3 new products during the quarter.
  6. API business saw sales of Rs 131 Cr which was up 89% YoY.
  7. In the complex generics space, the company has 14 in-licensed brands with a brand value above Rs 1500 Cr. The company has 10 more licensing deals that are under discussion with near-term commercialization opportunities.
  8. The management is guiding for U.S. generics price erosion of <5%.
  9. In the next 2-3 years, the company is looking to have at least 20+ injectable products that are expected to have a good value proposition in terms of limited competition and complexity.
  10. R&D spend is guided to stay within 7-8% of sales and it will be divided into shares with the largest being for generic portfolio (60%) followed by NCEs, biologics, and vaccines. There might be an increase in the allocation towards NCEs resulting in a fall of generic R&D share to 50%.
  11. Gross margins have improved in Q1 due to improved product mix and YoY growth in US business.
  12. The net debt was reduced by Rs 1500 Cr in Q1. The management believes that another Rs 1000 Cr of net debt reduction will take place in FY21.
  13. The company is one of the few ones to offer an entire portfolio of products targeting COVID-19. In diagnostics, the company currently does 2.5 to 3 lakh tests commercially every month. On the vaccine front, it is committed to being able to produce 100 million or 10 crore doses annually. The company has also launched Remdac which is the cheapest available Remdesivir brand in India priced at Rs 2800 per 100ml.
  14. The company is implementing digital technologies in its operations and front end to reduce costs and improve productivity. It is also adopting zero-based budgeting to identify potential areas for cost improvements.
  15. The company is starting Phase II trials for its COVID-19 vaccine where it is looking to enroll 1000 healthy volunteers. It expects to complete this phase by October.
  16. The reduction in net debt was afforded by better receivables management by the company and postponement of some Capex programs. The company has also set up a cash management office to manage our daily cash flows and everything as part of the response to the COVID.
  17. The company did see demand persisting in hydroxychloquine but it is still small at less than Rs 100 Cr in Q1.
  18. The company is committed to go to the FDA for its next clinical trial protocol for NASH and to take PBC forward after successful completion of the Phase II enrolment.
  19. The management has stated that the trial expenses will all be reflected in R&D.
  20. The main seasonality in the USA business is expected to be from oseltamivir capsules and suspension which is highly seasonal in nature. The company has guided for 5-10% growth in US generics in FY21.
  21. The company is waiting on clinical approvals from Russia, Columbia, and Mexico which are expected to come in the next 6 months and will result in meaningful sales in FY22.
  22. For the biologics, the company is aiming for markets in LATAM, North Africa, the Middle East, and Southeast Asia. It will focus on launching biologic in developed countries in the next phase.
  23. In the first phase of biologics, the company is focussing on products like PEG-G-CSF, trastuzumab, bevacizumab, adalimumab, rituximab, follicle-stimulating hormone, and parathyroid hormone.
  24. The management believes that the injectables portfolio to be at $150-200 million by FY24.
  25. The main reason for the company’s confidence in being able to provide the cheapest Remdesivir variant in India is the fact that it is completely backward integrated with even the APIs being made in-house.
  26. The management expects the momentum in API sales to continue going forward.
  27. The Phase III trial for the COVID-19 vaccine is expected to have around 5000-10000 patients in the study.
  28. The company is working with both the injectable and device delivery mechanism for this vaccine.
  29. The management believes that the company has sufficient capacity for the next 4-5 years.

Analyst’s View

Zydus Cadila is one of the leading pharmaceutical and wellness product makers in the country. The company has done well to maintain good growth in the US generic business and stay flat in the India business, both of which are the biggest revenue generators for the company. The company is expected to benefit greatly from its targeted portfolio of products and services for COVID-19 especially from RemDac which is currently the cheapest Remdesivir drug available in India. It also has massive potential in the injectables business where the company is looking to add a number of its products in the near future. It remains to be seen what the future holds for the pharma industry with the race to COVID-19 vaccine intensifying. The company also has FDA audits pending which can prove to be a downer if any negative observations are made during those audits. Nonetheless, given the strong positioning of the company in various pharma and consumer product categories and its ever-increasing specialty product portfolio, Zydus Cadila is an important stock to watch out for every pharma investor.


 

 

 

Q4FY20 Updates

Financial Results & Highlights

 

Standalone Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 2212 1570 40.89% 1741 27.05% 7197 6597 9.10%
PBT 693* 296 134.12% 223 210.76% 1558* 1741 -10.51%
PAT 606 230 163.48% 193 213.99% 1354 1440 -5.97%

 

Consolidated Financials (In Crs)
Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 3796 3771 0.66% 3658 3.77% 14367 13367 7.48%
PBT 522* 606 -13.86% 457 14.22% 1495** 2382 -37.24%
PAT 414 479 -13.57% 364 13.74% 1176 1852 -36.50%

*Includes an exceptional item of Rs 52 Cr.

**Includes an exceptional item of Rs 364 Cr.

Detailed Results

    1. Consolidated revenues were flat with only 0.66% YoY growth. Profit has fallen 13.6% YoY in Q4.
    2. FY20 performance followed a similar pattern with revenues rising 7.5% YoY while profits fell 36.5% YoY.
    3. The EBITDA for the quarter was up 13% QoQ.
    4. The company also filed 30 ANDAs in FY20 bringing the current total to 390. The company also got 28 new product approvals from USFDA in the year.
    5. In India, the company has launched an oral anti-diabetic agent Vinglyn and Vinglyn M. The company has stated that Vinglyn is one of the most affordable brands of Vildagliptin for diabetic patients in India.
    6. The company has received approval for Saroglitazar Mg in Non-alcoholic Steatohepatitis from the Drug Controller General of India. It has been approved for use in India to treat diabetic dyslipidemia and hypertriglyceridemia in patients with type-2 diabetes not controlled by statins alone. The drug also received approval to treat Type2 Diabetes Mellitus in India.
    7. The company got marketing approval from DGCI for a Hepatitis B vaccine. The company completed Phase I clinical trials for Inactivated Hepatitis A Vaccine while Phase I clinical trials for its Recombinant Hepatitis E Vaccine is currently in progress.
    8. The company received marketing approval for Twinrab from DGCI. It is a novel biologic to be used in combination with rabies vaccine for rabies post-exposure prophylaxis.
    9. The company is working on a DNA vaccine for COVID-19.
    10. The company recently signed a non-exclusive licensing agreement with Gilead Sciences Inc., for the manufacturing and marketing of Remdesivir, the investigational drug, in 127 countries.

Investor Conference Call Highlights

  1. Excluding the impact of COVID-19-related disruptions, consolidated revenues would have grown by 10% on a quarter-on-quarter basis. Consolidated EBITDA grew to INR 7.91 billion, up 13% on a sequential basis, adding a delta of INR 935 million over the previous quarter.
  2. EBITDA margins improved by 190 bps QoQ to 21.1%.
  3. Indian revenues grew 6% YoY and excluding the COVID impact it was expected to grow 11% YoY.
  4. US generics business grew 5% QoQ and the Rest of the World business grew 6% YoY.
  5. FY20 EBITDA margin stood at 19.5%.
  6. Excluding the impact of COVID-related disruptions, the company’s branded business would have grown by 11% during Q4 and by 10% during the year.
  7. The company’s gynec portfolio grew by 12.5% vs the market growth of 6.1%.
  8. The GI, gastrointestinal, portfolio registered a growth of 8.6% vs market growth of 7.9%, while the growth in the pain management portfolio was 12.4% vs market growth of 9.3%.
  9. The company’s pillar brands had sales of Rs 50 Cr each and they now account for 32% of branded formulations. These pillar brands grew 9% YoY while midsized brands which account for 24% of branded formulations grew 14% YoY.
  10. Zydus Wellness grew 22% YoY in revenues in Q4 and 115% YoY in FY20. This was mainly due to the completed end-to-end integration of the acquired business of Heinz India Private Limited.
  11. Excluding COVID-19 impact, animal health business should have grown 16% YoY in Q4 and 5% YoY in FY20.
  12. The USA accounted for 45% of consolidated sales for the company.
  13. Desidustat is also being evaluated in moderate COVID patients as it increases hemoglobin oxygen-carrying capacity.
  14. In February 2020, the company out-licensed the rights of Desidustat in China to CMS, China Medical Systems. This deal provides the company access to markets in Greater China, Mainland China, Hong Kong Special Administrative Region, Macau Special Administrative Region, and Taiwan, which have a significant number of CKD patients.
  15. Cadila has also received approval from DCGI to initiate a Phase I clinical trial for a new molecule, ZYBK2, and another investigational drug for treating rheumatoid arthritis.
  16. The company has 7 biosimilar products under early development.
  17. In Russia, the company is expecting approval of 2 key products by the 2020 end.
  18. The company is expecting volumes form the USA to go up resulting in better gross margins going forward.
  19. The company also saw a net debt reduction of Rs 400 Cr in Q4FY20.
  20. The company is targeting a net debt reduction of Rs 800-1000 Cr in FY21.
  21. The revenue contribution of mass products is 55% of India sales while specialty products contribute to 45% of sales.
  22. The salesforce proportion is 60-65% to mass products and 35-40% to specialty products.
  23. The company is expecting to approach the FDA for phase III trials for Saroglitazar in the USA.
  24. The management maintains that R&D costs will remain at 7-8% of revenues. Half of R&D goes into U.S. formulations and the rest goes to biological vaccines and NCE.
  25. The company has a good pipeline of vaccines with major peaks or good commercialization and value creation expected to happen in the year ’22, ’23.
  26. The revenues from biologics for FY20 were at Rs 278 Cr and vaccine revenues were at Rs 50 Cr.
  27. Capex for FY21 is expected to be around Rs 600-799 Cr and 80-85% is expected to be used for expansion of existing facilities and setting up newer facilities, mainly for the U.S. market. The rest of 10-15% will be maintenance Capex.
  28. The company will be able to start selling its version of Remdesivir from July end or August.
  29. The company has almost 40% market share in hydroxychloroquine in the USA. It has also done institutional sales for the drug to the Indian government of around Rs 8 Cr.
  30. Capacity utilization levels for the company have remained stable at pre-COVID levels.
  31. The company produced almost 20 tons of HCQ in Q1FY21.
  32. The company is focussing mainly on India and emerging markets for biologics. The company expects to have 12-15 products on this division by 2023 generating sales of Rs 150-250 Cr.
  33. The main reason for not pursuing biologics in the USA and the EU is that the risks and development costs in these regions for biologics are very high.
  34. The management expects to have almost 50 launches in injectables in the next 3 years.

Analyst’s View

Zydus Cadila is one of the leading pharmaceutical and wellness product makers in the country. The company has done well to maintain good growth in both India branded business and the US generic business, both of which are the biggest revenue generators for the company. The integration of Heinz into Zydus has progressed well so far and has helped the company generate good revenues from the corresponding segment. The company has also benefitted from the rush for HCQ from COVID-19 and has done well to form an agreement to make and sell Remdesivir in India. It remains to be seen what the future holds for the pharma industry with the race to COVID-19 vaccine intensifying. The company also has FDA audits pending which can prove to be a downer if any negatives observations are made during this audit. Nonetheless, given the strong positioning of the company in various pharma and consumer product categories and its ever-increasing specialty product portfolio, Zydus Cadila is an important stock to watch out for every pharma investor.


 

 

Q3 2020 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 1887.4 1725.1 9.41% 2090.7 -9.72% 5348.9 5390.4 -0.77%
PBT 321.8 431.5 -25.42% 713 -54.87% 1128.6 1590 -29.02%
PAT 281.6 363.3 -22.49% 627.9 -55.15% 988.2 1340 -26.25%

 

Consolidated Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 3658.2 3608.9 1.37% 3393.5 7.80% 10570.6 9595.5 10.16%
PBT 457.1 671.7 -31.95% 122.4 273.45% 973.4* 1776.2 -45.20%
PAT 373.9 510.7 -26.79% 107.2 248.79% 784.7 1388.7 -43.49%

*Includes an exceptional item of Rs 269.7 Cr for impairment of product-related intangibles.

Detailed Results

    1. Consolidated revenues were flat with only 1.4% YoY growth. Profit has fallen 27% YoY in Q3.
    2. 9M performance followed a similar pattern with revenues rising 10% YoY while profits fell 43.5% YoY.
    3. The EBITDA for the quarter was up 11% QoQ. The US formulations business sales rose 16% QoQ and the Indian branded formulations business grew 9.6% YoY.
    4. In the quarter, the company launched 9 new products in the US market. The company also filed 14 ANDAs bringing the current total to 386. The company also got 8 new product approvals from USFDA in the quarter.
    5. In India, the company has launched an oral anti-diabetic agent Vinglyn and Vinglyn M. The company has stated that Vinglyn is one of the most affordable brands of Vildagliptin for diabetic patients in India.
    6. The company has also filed an NDA (New Drug Application) for Saroglitazar Mg in Non-alcoholic Steatohepatitis with the Drug Controller General of India. The company also did a presentation of the same drug in NAFLD at the American Association for the study of Liver Diseases (AASLD), Boston.
    7. The company also announced the second Phase III DREAM-D trials of Desidustat, an Investigational New Drug (IND) targeted at treating anaemia in dialysis-dependent CKD patients, during the quarter.

Investor Conference Call Highlights

  1. The company’s EBITDA margins expanded 50 bps QoQ to 19.1% in Q3.
  2. The company’s India revenues grew 24% YoY to Rs 1370 Cr in the quarter.
  3. The rest of the world’s business grew 18% YoY.
  4. The management has maintained that the company’s decision to restructure the Indian formulations business into mass and specialty is bearing fruit.
  5. The company’s gynaec portfolio grew 10.1% vs market growth of 7%.
  6. The company’s gastrointestinal portfolio grew 9.5% vs market growth of 8.1%.
  7. The company’s pain management portfolio grew 15.2% vs market growth of 9.7%.
  8. The company’s cardiac portfolio grew 10% which was in line with market growth.
  9. The company’s pillar brands (annual sales > Rs 50 Cr) grew 11% in the quarter.
  10. Mid-sized brand (annual sales between Rs 25 Cr & Rs 50 Cr) grew 14% in the quarter.
  11. Zydus Wellness grew 129% YoY with revenues at Rs 324 in Q3.
  12. The animal health business grew 9.1% to Rs 140 Cr in Q3.
  13. The growth in the US formulations business was driven by growth in the market share of key products, an increase in sales of Oseltamivir on account of the flu season and the launch of new products during the quarter.
  14. The company is now the 4th biggest generics company in the USA in terms of prescriptions.
  15. The company also launched 3 new products in Brazil and one new product in South Africa.
  16. The biologics portfolio saw sales of Rs 73.7 Cr in Q3.
  17. In January 2020, the company entered into a licensing agreement with the China Medical Systems Holding Limited (CMS) for the development and commercialization of Desidustat in Greater China for the treatment of anaemia and CKD patients who are not undergoing dialysis as well as those who are on dialysis.
  18. The company will now aim to submit one NDA each year after 2020 to develop a portfolio of innovation-driven molecules and products.
  19. The integration of Heinz into Zydus has been largely completed and the final stages of salesforce integration are ongoing.
  20. The management has mentioned that Saroglitazar is going to be competing in the second-line treatment of diabetes The market for second-line treatment for diabetes is expected to be more than Rs 1000 Cr per year in India.
  21. The management has mentioned that the increase in HR costs has been mainly due to a rise in costs from the Heinz acquisition.
  22. The management has clarified that the company does not have significant exposure to China for its raw materials as most of its product lines are backward integrated.
  23. The company has a cover of 60-90 days for its API requirements.
  24. The management has stated that volumes growth has been strong for the company in the US market and the company is looking to continue filing aggressively in this market. Thus it expects the current trend of volume growth to persist in the near future.
  25. The company makes at least 50% of all of its product components in house and it will continue to keep this ratio going forward.
  26. The company is also looking to create a network of 10 KSM suppliers so as to reduce dependence on any single supplier.
  27. The management has guided that R&D should stay around levels of 8% of revenues.
  28. The net debt for the company is at Rs 6432 Cr as of the end of Q3.
  29. The management has also mentioned that it expects the FDA audit to take place in Q3FY21 at the earliest.
  30. The company is expecting >10% growth in the emerging markets in the coming year.
  31. The management believes that the current run rate of Tamiflu at Rs 23.5 Cr in the USA is sustainable and can grow around 5-10% QoQ going forward.
  32. The company has seen impressive growth in Brazil of 81% YoY and 23% QoQ in Q3.
  33. The management 8-10% growth in the external API business going forward.
  34. The company aims to earn margins close to 20% of the sales of Saroglitazar.
  35. The management maintains that the India Business has better margins than the overall company and these margins can be expected to rise further as the company achieves good sales growth in the future.
  36. The company also does not see any competition coming up in Asacol currently.
  37. The company is expecting Q4 volumes for Tamiflu and Oseltamivir to rise going forward because of the flu season in February.
  38. The company expects to launch 20-25 new products in FY21 without Moraiya and with Moraiya the number can easily rise to 30.
  39. The management has stated that mature products have been doing well for the company and it sees more growth in these products coming from Tier 3 & 4 towns and rural areas, where the company has good penetration for its e-business division.
  40. The management has stated that transdermals have gotten significantly delayed for the company. The company also has 3 valuable contraceptive products in line which it hopes to get approved next year.
  41. The company is seeing a constant fall in revenues and volumes for Skinlite and is thus planning to increase penetration with a larger field force to revive growth for this product.
  42. The company currently has around 150 marketed products in the USA market.
  43. In the biosimilar business, the majority of the business is drawn by the company’s 11+ biosimilars in India. The next phase of growth for this business is expected to come from the out-licensing of these products in different geographies. The company also has 18 products under development in this division. The management hopes to scale up this business in the coming 2 years.

Analyst’s View

Cadila Healthcare is one of the leading pharmaceutical and wellness product makers in the country. The company has done well to maintain good growth in both India branded business and the US generic business, both of which are the biggest revenue generators for the company. It has also seen good performance in other segments like animal health, biosimilars, consumer products, etc. The integration of Heinz into Zydus has progressed well so far and has helped the company generate good revenues from the corresponding segment. It remains to be seen how the company will be able to maintain its above-market growth rate given the ever-intensifying competition in the generics business in the USA. The company also has FDA audits pending which can prove to be a downer if any negatives observations are made during this audit. Nonetheless, given the strong positioning of the company in various pharma and consumer product categories and its ever-increasing specialty product portfolio, Cadila Healthcare is an important stock to watch out for every pharma investor.


Notes on Annual Report (FY 18-19)

Management Discussion Analysis

  • The global sales of prescription pharmaceutical drugs are expected to grow in low to mid-single-digit and cross US$ 1.5 trillion by 2023. The key geographies of growth will continue to be the United States and emerging markets, which are likely to grow in mid to high single-digit over a period of next 5 years.

 

  • In the US, the growth is likely to be driven by new product introductions and brand pricing though expiration of exclusivity and introduction of generics are likely to increase competition in the market.

 

  • The growth in Europe is likely to remain low on account of various cost-containment measures and lower contribution from new products going forward.

 

  • Pharmaceutical spending in China, the second-largest pharmaceutical market in the world, is also expected to slow down with an estimated compounded annual growth rate of <5% over the next 5 years.

 

  • Indian pharmaceutical market will be one of the fastest-growing markets in the world over the next 5 years. The growth of the overall population and aging population, improvement in purchasing power and access to quality healthcare and pharmaceuticals to poor and middle-class families will drive the growth of the Indian pharmaceutical industry.

 

  • It is expected that out of the total new product introductions over the next 5 years, around two-thirds will be specialty products, lifting the share of specialty products in the overall product portfolio.

 

  • Growth of biosimilars in the US in the near future is likely to be a significant factor as biosimilar introductions will lead to a reduction in prices by manufacturers of innovator products, which is likely to affect the pharmaceutical market in the US.

 

  • Emerging markets are going to become increasingly important for future growth and profitability of the pharmaceutical industry on the back of rising spending power of customers in these markets.

 

  • Cadila invests approximately 7 to 8% of its annual revenues on innovation. More than 1400 scientists across its 8 state-of-the-art R&D facilities focus on New Chemical Entity (NCE) and New Biological Entity (NBE) research, development of biosimilars and vaccines, generic product development covering various dosage forms such as oral solids, having both immediate release and modified release pattern, injectables, topicals, transdermals and nasal products and API process development.

 

  • Snapshot on Research and innovation

 

  • Complex generics are the products which are either difficult to develop or difficult to manufacture and hence, have a significant entry barrier to the market. It also requires significant investment for development and dedicated manufacturing setups.

 

  • The company has invested the resources to develop and manufacture complex generics such as modified release oral solids, complex injectable, transdermal and drug-device combinations to ensure sustainable future cash flows from this business area.

 

  • Strategic partnerships for the development of complex generics help the company reduce product development timelines and manage associated risk and investments optimally.

 

  • The complex injectable is going to be one of the key future growth drivers for the company’s US business.

 

  • The company started the financial year 2018-19 with a high base of 2017-18 which was created on account of a launch of a few high-value products in the US market. On such a high base, the Company was able to grow its top line, operating profit, and net profit, albeit at a slower pace.

 

  • US formulations business remained the largest business area for the company, accounting for around half of the consolidated revenues.

 

  • In terms of new product approvals from the USFDA, the year gone by was similar to the previous one as the Company received 74 new products approvals during the year after receiving 77 new product approvals in 2017-18.

 

  • In terms of introduction of new products in the US, the year 2018-19 was the most successful year for the company with 43 new product launches during the year, which is the highest number of products launched by the company in the US in a single year till date.

 

  • On the regulatory front, Oral Solid Dosage formulations manufacturing facility located in Ahmedabad SEZ, Injectable formulations manufacturing facility of Alidac Pharmaceuticals Limited located in Ahmedabad SEZ and Biologics manufacturing facility located at the Zydus Biotech Park in Ahmedabad successfully completed the USFDA inspections during the year.

 

  • India formulations business was impacted in the second half of the year on account of an initiative undertaken by the company to rationalize the portfolio to bring in better focus, improved margins and supply chain efficiencies.

 

  • In the consumer wellness space, the company expanded its portfolio by acquiring Heinz India Private Limited, which has 4 main brands including 3 iconic brands viz. Glucon-D, Nycil and Complan with Glucon-D and Nycil being the market leaders in their respective categories.

 

Financial Performance in FY2018-19

  • Total income grew 10% to Rs. 13,165 Cr. Revenues from US formulation business grew 8% to Rs 6,279 Cr. India formulation business grew 6% to Rs 3524 Cr.

 

  • The EBITDA margin stood at 22.6% whereas net profit margin was at 14%.

 

  • ROE came down from 23% last year to around 19% in FY19. Reasons for the same are as follows:
    • Increased competition in key products of the US business and resultant reduction in prices
    • Muted performance of India formulations business, and
    • Increase in finance costs

 

  • The net debt-equity ratio increased from 0.44 to 0.68 in FY19 on account of funds borrowed to partially finance the acquisition of Heinz India Private Limited during the year.

 

  • The consolidated gross block (including capital work in progress) at the end of the year was Rs. 165.4 billion, a YoY increase of Rs. 56.6 billion which was mainly due to the acquisition Heinz India Pvt. Ltd. by the subsidiary of the Company viz. Zydus Wellness.

 

  • Excluding acquisitions, net capital expenditure including capital work in progress during the year was Rs 9,371 million which was incurred mainly for the creation of new facilities and up-gradation and capacity expansion of existing facilities.

 

Business Performance in FY2018-19

  • The Company is now ranked seventh amongst generic companies in the USA (based on prescriptions), a rise of two positions from last year. The Company gained its market share by 0.43% compared to last year and currently has a 3.48% market share (Source: IQVIA, NPA Audit, MAT March 2019 TRx).

 

  • The year gone by was the most successful one for the company in terms of new product launches as the Company launched 43 new products during the year, which is till this year the highest number of new products launched by the Company in a single financial year.

 

  • Going forward, the US business is likely to continue its growth momentum on the back of new product launches and expansion of overall product offerings as the Company is planning to introduce additional topical, transdermal and injectable products in coming years. Specialty portfolio is also likely to be a significant growth driver in times to come.

 

  • In the India formulation business, the company took two initiatives from October 2018 for increase in-field productivity, which are (1) better management of brands and (2) success of new products. For increasing the field force productivity, the Company rolled out a new sales force engagement model in around 70% of the territories during the year while the remaining territories would be covered from October 2019 onwards. For better management of the brands, the Company focused on increasing the penetration of key brands to cover untapped territories and allocating more resources to promote them.

 

  • The Company is the fourth-largest pharmaceutical company in India with 4.1% market share and is ranked amongst the top three players in the promoted covered market of gynecology, respiratory, pain management, cardiovascular, dermatology and gastrointestinal therapeutic areas.

 

  • Therapeutic area-wise breakup and Company’s ranking in the same area is shown below:

 

  • During the year, Cadila’s subsidiary company, Zydus Wellness, successfully completed the acquisition of Heinz India Private Limited (Heinz India) and thereby expanded the wellness portfolio to strengthen the core business of Food and Nutrition. The acquired business has 4 brands out of which 3 are iconic brands viz. Glucon-D, Nycil and Complan with Glucon-D and Nycil are market leaders in their respective categories. The acquisition also includes two large manufacturing facilities of Heinz India in Aligarh and Sitarganj and teams devoted to operations, research, sales, marketing and support.

 

  • As per A.C. Nielsen MAT March ’19 report, Zydus Wellness continued its leadership position by maintaining 93.8% of artificial sweetener category with the help of the Sugar-Free Brand. EverYuth maintained its leadership position in the peel-off mask and scrub categories with market shares of 84.9% and 32.4% respectively. The acquired brands viz. Nycil and Glucon-D also maintained their leadership positions in their respective categories of prickly heat powder and glucose powder with market shares of 32.1% and 59.5% respectively.

 

  • The Company is one of the leading animal healthcare players in India, having a portfolio of drugs, vaccines and feed supplements for livestock, poultry and companion animals. The year gone by was an encouraging one for the Company as the overall market in India grew more than 10%. Overall, the Company’s animal health business posted sales of Rs. 511 Cr during the year, up 15% YoY.

 

  • The Company’s business in the emerging markets of Asia Pacific, Africa, Middle East and Latin America posted sales of Rs.831 Cr during the year, up 9%.

 

Analyst’s View

Cadila Healthcare is a long-standing company with a proven track record of more than two decades in the pharmaceutical space. It has created a lot of wealth for the shareholders in the same period.  The recent USFDA inspection and Official Actions Initiated (OAI), we believe, is a short term set-back and the company would be able to resolve in due course.

The company is trading at only 14 times trailing earnings. Given the growth in earnings expected for the next couple of years, the current valuation seems very reasonable with limited downside. Cadila also holds 67% stake in its listed FMCG subsidiary Zydus Wellness which is growing strong and has a long runway to growth. Zydus Wellness has recently acquired Heinz India’s business comprising leading brands like Complan, Glucon D, Nycil and Sampriti Ghee brands along with its two large manufacturing facilities. While the valuation of  Zydus Wellness appears to be stretched at about 45 times trailing earnings, investment in Cadila Healthcare’s stock is a good way to get exposure of the growing business of  Zydus Wellness at a reasonable valuation.

 

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