The recent correction presents a good opportunity to buy the stock of Cadila Healthcare. The company’s healthy prospects in the US market, thanks to the large pipeline of drugs pending approval by the US drug regulator — Food and Drug Administration (FDA) — augurs well for the Cadila stock.

Further, recovery in the domestic market, after a weak show in 2014-15 due to price cuts and withdrawal of certain in-licensed products, should improve the company’s prospects.

Besides, any further depreciation of the rupee against the US dollar will provide a leg-up to Cadila’s profitability.

The stock currently trades at less than 20 times its expected 2015-16 earnings, implying a 15 per cent discount to peers, such as Lupin.

Investors with a three- to five-year horizon can buy the stock. Cadila derives about 40 per cent of its revenue from the US market.

The company has filed over 260 products with the US FDA so far; of this, only 99 have been approved. Many of the drugs pending approval are high-margin, low competition products, such as vaccines, nasal sprays and transdermal patches.

Higher contribution from such products will improve Cadila’s profitability. In addition to these, the company is expected to launch a few generic products, for which it will enjoy exclusivity for a period of six months.

This includes the generic version of Shire’s Lialda, used to treat ulcerative colitis, and Novartis’ heart burn drug Prevacid ODT. Given the strong pipeline of products pending approval, Cadila’s US business has the potential to double its revenue, from the current $500 million, over the next three to four years.

More product offerings

Growth in the domestic market remained subdued last fiscal, following write-backs due to price cuts mandated by the Indian drug price regulator — National Pharma Pricing Authority (NPPA). Withdrawal of products, which were in-licensed from Boehringer Ingelheim, also impacted Cadila’s growth in the home market.

The company is now sharpening its focus in the biologics space, particularly in the domestic market, and recently launched a new business unit — Zydus Biologics. Cadila, which sells about seven biologic drugs in India, plans to double its product offering over the next three to five years.

Overall, the company launched 55 products in India last year, of which 19 were first-time launches.

This should help the company sustain healthy high-teen growth in the domestic market. Cadila is conducting studies on its first innovative oral drug Lipaglyn to validate its efficacy in treating liver disease in diabetic patients.

The drug was launched in India in 2013 to treat dislipidemia and diabetes. If approved, this will help Cadila expand the market for Lipaglyn.

Widening presence

Besides healthy revenue growth, more contribution from high-margin geographies — India and the US — and better product mix should add to profits. This, along with efforts to prune costs should help the company improve its operating profit margin over the next three years.

In 2014-15, Cadila's revenue grew 20 per cent to ₹8,651 crore. Its operating profit margin improved by 370 percentage points to 20.3 per cent, while net profit rose 43 per cent to ₹1,151 crore.

With a debt-equity ratio of 0.5 as of March 2015, the company is well placed to borrow to pursue its inorganic expansion plans.

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