The Hindu Business Line : Cadila Healthcare: Book profits partially

PARTIAL profit booking may be considered in the Cadila Healthcare stock. Investors can also consider part-liquidating their holdings at significant upticks from current levels so as to lock into concrete gains. Re-entry can be contemplated at lower levels.

The stock witnessed a sharp surge over the past month and a half, gaining about 70 per cent since July 1 when it traded at about Rs 190.

The company has been one of the beneficiaries of the bull run in mid-cap pharma stocks over the past three months. Such recent developments as the efforts by the regulatory authorities in the US to facilitate a faster entry of generics into the American market have come as a shot-in-the-arm for pharma stocks.

At the current price of Rs 325, the Cadila stock trades at a price earnings multiple (PEM) of 23 times its trailing 12-month earnings per share. This PEM is at the upper end of the stock's valuation spectrum; Cadila's valuation is now comparable to that of frontline pharma stocks such as Cipla and GlaxoSmithKline, and is at a considerable premium compared to another stock in the mid-cap category, Glenmark Pharma, which trades at about 13 times its per share earnings.

Acquisition-led strategy

Cadila has consciously adopted a strategy to grow through acquisitions. It acquired German Remedies, Recon Healthcare and the Vadodara-based Banyan Chemicals (which has a US FDA-approved plant and is being used as a vehicle to target regulated export markets).

The acquisitions have provided complementarity to the company's offerings in the domestic formulations market. For instance, the German Remedies acquisition gave Cadila access to the former's strong product line in the women healthcare and respiratory segments.

In line with its strategy of pursuing growth through the inorganic route, Cadila recently made its first overseas acquisition — of Alpharma SAS of France for about Rs 30 crore. This will give Cadila a toehold in the market for generics in France that is expected to top $2 billion by 2005.

However, near-tem contribution from this acquisition may not be substantial and its revenue potential might kick in only a few years down the line.

Product portfolio

What is important about Cadila's product portfolio, post its acquisitions, is the gradually decreasing dependence on the anti-infective therapeutic area. This is the single largest therapeutic segment today. But with intense price competition, the growth in this segment has been glacial.

A presence in the lifestyle segment that addresses cardiovascular diseases and disorders pertaining to the gastro-intestinal and the central nervous system is vital for growth.

Cadila has a fairly strong presence in the lifestyle segment. The other advantage of focussing on this segment is that most drugs fall outside of the ambit of price control, providing Cadila with much latitude on pricing. Additionally, the demand for drugs in these segments tends to be, by and large, price inelastic. However, with a clutch of companies, both MNC and domestic, targeting the lifestyle segment, exports to regulated markets will drive earnings growth.

Exports of formulations and bulk drugs chip in with 11 per cent of Cadila's revenues. In contrast, a company such as Dr Reddy's derives upwards of 60 per cent of its revenues from markets abroad. To counter the sluggishness in the growth of the domestic industry, Cadila's efforts to grow its exports should pep up revenues.

Financials