Feb 17, 2017 05:53 PM IST | Source:

Analysts give a thumbs-up to Cadila on resolution of FDA warning

Brokerage firms and analysts tracking the stock welcomed the development and most have raised the target price. To be sure a lot of them were expecting resolution of the warning letter on Moraiya facility in the fourth quarter of FY17.

Moneycontrol Bureau

Cadila Healthcare, a part of Ahmedabad-based Zydus Cadila Group yesterday, said it did not receive any observations from USFDA for its formulation facility at Moraiya in Gujarat indicating a successful resolution of the warning letter on the plant.

With the major regulatory overhang removed shares of Cadila have gained as much as 20 percent in the last two trading sessions.

Shares of Cadila rose 3.62 percent and were trading at Rs.445 on BSE at 10.06 am; the benchmark Sensex gained 0.63 percent to 28,479.50 points.

Moraiya facility is critical to the company -- as it accounts for roughly USD 360 million in sales, constituting around 55-60 percent of Cadila's US sales. US is the most profitable and high margin business for the company.

Out of total 200 pending US approvals, about 60 originate from Cadila's Moraiya plant.

Brokerage firms and analysts tracking the stock welcomed the development and most have raised their target price. To be sure a lot of them were expecting resolution of the Moraiya facility in the fourth quarter of FY17.

“Moraiya manufacturing facility remains critical for the company as a significant portion of current US sales come from this facility, including some high value fillings,” said Morgan Stanley in its research note.

Morgan Stanley noted that Prevacid, Sirolimus, Toprol Xl and Lialda are a few interesting opportunities that will likely play out in FY18 post Moraiya resolution.

Morgan Stanley raised the target price from Rs 439 to Rs 539 and maintained overweight on the stock.

CLSA called the resolution of Moraiya facility a “shot in the arm” and raised the target price to Rs 480 from Rs 390, maintaining an outperform call on the stock.

“We believe the benefit of Moraiya’s clearance will be more visible in FY19 versus FY18 and raise FY18-19CL EPS by 3-9 percent," CLSA said.

“We believe Cadila US business which had been held hostage by the outstanding Moraiya issues is now at an inflection point, with several key launches anticipated. We expect an increasing US contribution to total sales to be a key lever driving EBITDA margin expansion in the medium term,” said Macquarie in its research note.

Macquarie raised the target price to Rs 525 over its earlier Rs 425 and maintained outperform on the stock.

ICICI Securities revised target price of the stock to Rs 460 per share based on 20x FY’19E compared to Rs 383 based on 18x FY19E earnings.

“We expect revenue and adjusted PAT to see a decline in FY17 due to muted US business and lower margins. However, we expect revenue and net profit CAGR of 18.7 percent and 33.6 percent over FY17-19 largely driven by US business,” said ICICI Securities in research note.

Deutsche Bank calling the development a “big positive” said the upside appears to be price in. “While we believe the regulatory risk has eased, the stock factors in the earnings upside from the US business, and hence we maintain our hold rating.”
Deutsche revised the price target to Rs 404, and maintained its hold rating.

"For a 1-2 year time frame we can invest in Cadila. I see re-rating happening of the stock. Earnngs will start gaining momentum from here on," said Amey Chalke of HDFC Securities.

The USFDA inspected the Moraiya facility in September 2014 and issued a Form 483 observation. The issue was escalated further in December 2015, when the USFDA issued a warning letter over recurrence of product quality failures related to warfarin tablets, deficient standards of practice (SOP), among others. In July 2016, Moraiya received an EIR indicating closure of 483 observations corresponding to the inspection in September 2014. Observations mentioned in the December 2015 warning letter were still unresolved; the FDA has now cleared these.
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