We believe Cadila’s R&D collaboration deal with Eli Lilly is a positive as it corroborates Cadila’s capabilities, although material cash flow would come over long term.
This is Cadila’s first collaborative agreement with a big Pharma company in the R&D space, which may in the long-term unlock value for its R&D business.
The deal involves discovery and development of potential molecules primarily in cardiovascular research.
Cadila will initiate the drug discovery, lead identification and optimisation, and conduct pre-clinical studies and clinical trials up to Phase IIa (Human Proof-of-Concept).
Eli Lilly will provide the chemical starting points, expertise and feedback regarding toxicology, ADME, chemistry, biology, clinical and regulatory aspects as needed to potentially increase the probability of success of the programme.
Eli Lilly will have the option to licence any resulting molecules at different stages. The deal covers milestone and royalty payments on successful launch of the product.
At Rs271, the stock is trading at 11.3x FY2009E and 9.3x FY2010E earnings. While overdependence on Nycomed has been a major concern for Cadila, we believe that new client additions in the segment would aid de-risking and reduce the company’s dependence on the same.
Further, the Hospira joint venture (JV) is expected to commercialise in April 2009 and start contributing to the company’s bottomline from FY2010.
Excluding any upsides from the JVs and factoring in a decline in the profitability of Nycomed, we expect the company to post a CAGR of 24% in net profit over FY2008-10E.
We maintain a BUY on the stock, with a target price of Rs350.