Slimona brand Rimonabant diet pills, made by Cadila Healthcare Ltd., are arranged for a photograph in Mumbai, India (Photographer: Scott Eells/Bloomberg News)  

Dual Upgrade, Drug Approval Boost For Cadila’s Shares

Analysts are betting on a Cadila Healthcare Ltd. turnaround.

Shares of India’s fifth-largest drugmaker by sales jumped the most in a month and a half as it won approval from the U.S. regulator for a hypertension drug and Nomura and CLSA turned bullish on the stock citing improved outlook.

The generics maker received the final nod from the U.S. Food and Drug Administration to market metoprolol succinate ER Tablets in multiple strengths, the company said in an exchanging filing. The drug will be made at its facility at the Ahmedabad Special Economic Zone.

That comes as Indian generics companies face pricing pressure amid rising competition in the U.S., one of their largest markets. Shares of Cadila plunged 30 percent since its all-time high in June last year compared with a 12 percent decline in the benchmark Nifty Pharma index.

Cadila will be the fourth company to sell the drug used to treat chest pain, heart failure and high blood pressure. Popularly known as Toprol, it has a market size of approximately $500 million, according to data provided by market research firm IMS Health.

It could provide a $35-40 million opportunity as long as there is no further competition, Param Desai of Elara Capital wrote in a note to clients. Cadila’s U.S. business should continue to see traction in the next financial year starting April with more high-value launches in the pipeline. The brokerage has a price target of Rs 468 on the stock, implying a 20 percent upside from current levels.

Also Read: U.S. FDA Conducts Surprise Audit At Cadila’s Moraiya Plant

Shares of Cadila were trading over 5 percent higher, the biggest jump since Feb. 12, at Rs 388 apiece after the company’s announcement and Nomura and CLSA’s decision to upgrade the stock. Twenty-seven of the 41 analysts tracked by Bloomberg have a ‘buy’ rating on the stock, 12 have a ‘hold’ and two recommend ‘sell’. The Bloomberg consensus target of Rs 482 indicates a 25 percent upside.

CLSA upgraded the stock to ‘buy’ from ‘underperform’ with a target price of Rs 450. The brokerage said that valuation multiple of next two years is attractive following a correction of more than 30 percent since last April.

“A strong U.S. pipeline despite a high base, and improving India and EM (emerging market) outlook led by biosimilar and vaccines launches are the key potential earnings drivers,” Alok Dalal, pharma analyst at CLSA, wrote in a note. “Long-term drivers include a specialty products initiative in the U.S. along with novel research efforts.”

Nomura too upgraded the stock to a ‘buy’ from ‘neutral’ with a revised target of Rs 426. The Japanese brokerage said the fall is significantly higher than consensus earnings cut of 10 percent and now the risk-reward is favourable.

“There is strong earnings support in the near term driven by contribution from gLialda, gAsacol HD and gTamiflu and no pending regulatory concerns currently,” Saion Mukherjee, pharma analyst at Nomura, wrote in a note. “We expect the launch momentum to remain strong.”

Among the risks cited by Nomura and CLSA are faster-than-expected decline in key limited competition products, inability to ramp-up new launches in the U.S. and enhanced pricing pressure in the U.S.

IIFL, the only brokerage with a target price lower than the current price, sees the risks as a bigger concern. It cited Teva’s entry into Lialda and drastic drop in revenues in Asacol—both the drugs are used for inflammatory bowel disease—as the key reasons for its ‘reduce’ rating.

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