MOSL: CADILA HEALTH (Buy)-Strong operating performance driven by key launches in US

​Cadila Health: Strong operating performance driven by key launches in US

(CDH IN, Mkt Cap USD7.1b, CMP INR499, TP INR555, 24% Upside, Buy)

• 2QFY18 net revenue rose ~37% YoY to INR32.3 b (9.4% beat). Gross margin improved to ~66% (+180bp YoY, ~400bp QoQ). EBITDA grew 66% YoY to INR8.6b (+18.4% beat), with the margin at ~26.5% v/s 21.9% in 2QFY17 and 12.6% in 1QFY18. Significant improvement in margin and revenue is attributed to strong growth in the US and a recovery in domestic business sales. PAT rose 49% YoY to INR5b (5% beat).
  
• Strong growth in US driven by key launches: US business rose 66% YoY (+70% QoQ) to INR16.4b, led by Lialda launch. Lialda sales are likely to decline due to AG launch, but ramp-up of Tamiflu suspension and other key launches (incl. Asacol HD, Toprol XL, Prevacid ODT) should help maintain strong growth. Post successful resolution of Moraiya facility, we expect ~80 ANDA approvals until FY19 for CDH. ~50% of these are expected to come from Moraiya facility, and the rest from Baddi/SEZ facilities. Driven by these approvals/contribution from Sentynl acquisition, we expect US sales CAGR of >30% until FY19. India business grew ~15% YoY to INR8.95b in 2QFY18.
  
• Concall takeaways: 1) Base business erosion in US was ~2.6% QoQ; CDH expects base erosion of ~10% YoY in FY18 and 8-10% YoY in FY19. 2) Tax rate guidance of ~22-25%. 3) Plans to launch 15 ANDAs and 40 ANDAs in 2HFY18E and FY19E, resp. 4) Transdermal approvals in 1HCY18E, launches in 2HCY18 (incl. Exelon patch). 5) Received CRL for Duragesic Patch; launch thus not expected in next 12 months. 6) Prevacid ODT (before Dec-17) and Toprol XL (before Mar-18) TAD are in FY18E. 7) Gross debt at INR52b and net debt at INR40b (as of end-1HFY18E); debt to come down further by INR4-5b in 2HFY18; 8) CDH will file 35-40 ANDAs p.a. 9) R&D guidance of 7-8% p.a.