Lupin & Cadila: Prescribed For Your Portfolio

Pharma peers Lupin and Cadila Healthcare are two companies that are growing strongly and providing investors with rewarding opportunities. Shrikant Akolkar gives you a comparative picture of their stellar performance.

Key Points

• Both the companies have are looking at USD 3 billion in revenues by 2015, for which Lupin is required to grow by 21 per cent while Cadila is required to grow by 31 per cent.
• Both the firms operate in emerging as well as advanced markets, and have continued investing strongly in their research and manufacturing capabilities.
• On the financial front, both are in a high growth phase, with similar product lines.

In a country where lower industrial output and higher inflation are burning issues, two drug companies; Lupin and Cadila Healthcare caught our attention for their ambitious growth intent of getting to USD 3 billion in revenues by 2015. Simply going by their revenue guidance (in CAGR terms – base year FY12), Lupin is required to grow by 21 per cent while Cadila is required to grow by 31 per cent.

What do these two companies have in common? For one, they both have been in the business for quite some time now, with Cadila being around for nearly 60 years and Lupin for almost 44 years. Both of these companies are focusing on organic as well as inorganic growth and a few joint ventures in place are also adding to their overall growth. In the last 10 years, they have taken more than half a dozen firms into their fold in their quest for growth. Both of them have their feet firmly set in different geographical markets, and have continued investing strongly in their research and manufacturing capabilities. Here is an objective analysis of the strengths that these two companies have on offer which makes not one but both of them ideal candidates for a portfolio today.

Lupin and Cadila show nearly identical growth rates. Lupin has registered a five year compounded annual growth rate (CAGR) of 26 per cent, while Cadila’s revenues have been growing at 24 per cent. The operating profit margins for both the companies during this period too have remained within a band of around 20-21 per cent. In terms of profitability also, the two offer very little scope for differentiation. Their EPS has been growing at an identical rate of 21 per cent during this period. Surprised? Well there’s more. Recently, the two companies have posted sales in excess of USD 1 billion, joining top pharma companies like Ranbaxy and Dr Reddy’s Labs.

Investors would wonder if there is anything at all to differentiate these two businesses. Well, the growth rates may look the same over the recent past, but it should be said that Lupin has managed to achieve this growth in a shorter time period than Cadila.

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Domestic Business

Both these companies have a very strong presence in the domestic market, with Lupin deriving 31 per cent and Cadila 36-37 per cent of its revenues from here. Cadila’s domestic revenue share goes up to about 44 per cent if we consider revenues from Zydus Wellness, which endorses brands like Sugar Free, EverYuth and Nutralite. Cadila earns nearly 50 per cent of its domestic revenues in three therapeutic segments – cardiovascular, gastrointestinal and respiratory. Similarly, Lupin also derives nearly 50 per cent of its domestic revenues from the cardiovascular, antibiotics and generics.

Lupin has an impressive growth rate in the domestic market. Its revenues have grown by nearly 21 per cent, outpacing Cadila’s growth rate of about 15 per cent. Recently, Cadila acquired Mumbai-based pharma company Biochem Laboratories (turnover Rs 260 crore) in a bid to further boost its domestic revenues. According to the Cadila management its field force is expected to be more productive and that the company can achieve a growth of over 15 per cent in the domestic markets. It is likely that its growth rate may not outpace that of Lupin, but still it looks attractive as compared to that of the industry, which is growing at 15 per cent.

Cadila’s business has few distinctive aspects. The company has joint ventures with pharma biggies like Nycomed, Hospira and Bayer. It also has a strategic out-licensing deal with Abbott Laboratories, under which 24 products from Abbott’s branded generics portfolio will be licensed to it from the next fiscal onwards. Besides, it also has an animal health business, Zydus Animal Health. The revenues from its joint ventures are growing in double digits, and these are expected to rise in the future as the Abbott deal kicks in. In the animal health business, Cadila is growing in double digits as well (17 per cent). Higher growth can be expected in the future in this business as Cadila has acquired German company, Bremer Pharma, GmbH, for an undisclosed amount. With new product launches in the domestic business, the animal health business and JVs, its growth will remain intact or will surge higher in future.

Lupin relied highly on its antituberculosis products at one point, but it has now weaned away from this dependence to emerge as a top company on the Indian pharma horizon. The company has expanded its business aggressively in other countries by inorganic means. It started its branded business in the US in the year 2004. Since then, revenues have grown nearly six times, which means that from 2004 the company has added about Rs 630 crore to its topline each year.

Global Footprint

Cadila and Lupin have a geographical presence in advanced pharma markets like the US, Europe and Japan. Besides, the two companies also have a significant presence in the emerging markets, and opportunities for growth will come in equal proportion for both of them. The untapped market Mexico is where the next level of growth lies. Lupin and Cadila have started operations there lately, but the revenues are only expected to come in by next year.

US Business – A Huge Opportunity

In the US, Lupin is one of the top companies in terms of number of prescriptions. Over the last five years, its sales in the market have witnessed a CAGR of 48 per cent while the revenue contribution has increased from 20 per cent in FY07 to 38 per cent in FY12. The company has been launching more and more products in the US market, and will continue to do so. It has a presence in oral contraceptives (OCs) in the US market, which has a growing demand. The company expects USD 150 million revenues (about Rs 675- Rs 850 crore) from OCs by FY14, which is 10 per cent of its FY12 revenues. The company also has USFDA approvals for many products, including Tricor (USD 1.3 billion), Cymbalta (USD 3.5 billion) and Solodyn (USD 750 million). Lupin has settled many of its litigations over generic versions of drugs it intends to launch in the US which is likely to help it shore up revenues going forward.

Cadila is equally competent in the US market, from where it derives 24 per cent of its revenues and has a 55 per cent growth rate (five year CAGR). After its recent acquisition of USbased Nesher Pharma for Rs 200 crore, the company is expecting to add USD 100 million (about Rs 500 crore) over the next three years, which will be 10 per cent of its FY12 revenues. It has also entered into an agreement with pharma company Microbix to market the thrombolytic drug Urokinase, the launch of which is expected in 2015.This will present an opportunity ofaround USD 400 million (approximately Rs1800-2250 crore) by 2020. The company is also set to monetise its pipeline of products in the next twothree years, which will help it reach the USD 3 billion benchmark.

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Europe, Japan & Other Markets

Both Lupin and Cadila have operations in Europe and Japan. Lupin is a leading Indian company operating in the Japanese market. It has a strong base in that country, with 12 per cent of its revenues derived from there. For FY12, the company’s revenues in the Japanese market grew by 38 per cent to Rs 860 crore. It has recently acquired Tokyo-based I’rom Pharma, which has a significant presence in the injectables and hospitals segment in Japan. Cadila, on the other hand, has a small presence in Japan but is set to launch many products there, which will increase its revenues from the country. Cadila’s Japanese revenues grew by 24 per cent in FY12 to Rs 52 crore.

In the European markets, both companies have a growth rate of nearly eight to nine per cent. The lower grow rate in the European markets is mainly due to th ecompetitiveness of those markets as well as the absence of blockbuster drug patent expiries.

The other geographical markets contribute much lesser to the topline, and both companies are aiming to increase their presence there too.

Financial Performance

On the financial front, both the companies are in a high growth phase. Lupin reported 22 per cent growth in the topline to Rs 6959 crore for the year FY12, with the EBITDA margins at 21 per cent. Its net profit grew by seven per cent, which was below expectations as the company’s acquisition in Japan increased its employee costs. Besides, the company also lost its ‘Export Oriented Unit’ status on two of its units, which meant higher taxes. Cadila, on the other hand, reported a 14 per cent rise in its topline. The net profit declined by eight per cent due to the forex losses of Rs 117 crore. Its EBITDA margins declined mainly due to the higher operating expenses (rupee impact).

Both the firms have guided that the tax rate for the next year will be at about 20 per cent. Cadila’s debt-to-equity ratio (0.7x) is currently higher than that of Lupin (0.3x). Lupin seems to be slightly more aggressive in its R&D expenditure (7.5 per cent of the total revenues) as compared to Cadila (6.9 per cent). They are also are neck-to-neck as regards their product pipelines slated for different geographies, which is an outcome of their R&D spends.

Valuations

On the valuations front, the stocks of Lupin and Cadila are available at PEs of 27x and 24x of their respective FY12 EPS. On the EV/EBITDA front, both companies are trading in the range of 16x-17x. The notable fact here is that Lupin is available at a premium to Cadila as it has a strong pipeline of products for the US and the Japanese markets. Lupin has about 86 Para IV filings worth USD 30 billion. Of these, 21 are ‘First To File’ approvals with nine exclusives. The company is planning to launch 120 products in the US in the next three years. The price of Lupin has surged by 17 per cent in the first half of this year vis-a-vis Cadila, which is up by 9 per cent.

Cadila, on the other hand, has one USFDA issue on its injectables facility in India. The manufacturing site has been re-inspected. According to the management, the potential revenue loss would be limited to USD 10-20 million, and hence, there is a limited downside (one-two per cent of the topline). But this company too has a few FTF’s approvals in the US market which will help it going forward.

Both the companies are also consistent in their dividend payments.

Looking at the overall business and future opportunities, Lupin and Cadila are well positioned to grow at a good pace, and we recommend that readers invest in both these companies.