>Cadila Healthcare (EMKAY)

Cadila Healthcare entered into an agreement with the US-based pharma major Eli Lilly for the discovery and development of drugs in the area of cardiovascular research. Under the agreement, Lilly would have an option to license any resulting molecules at different stages. Cadila Healthcare would receive potential milestone payment of up to $300 million and royalties on sales upon the successful launch of any compounds. The exact impact on earnings will not be ascertained because of lack of information. However, we view this development as positive for the company as it demonstrates the R&D capabilities of Cadila Healthcare. We reiterate our Buy rating on the stock with a target price of Rs339.

R&D pact with Eli-Lilly
Cadila Healthcare will be responsible for identifying potential drug candidates and developing them through to Phase II Human proof-of-concept. Lilly will provide the potential molecules and expertise and feedback for clinical, regulatory and research work. Collaborative research program may continue for a span of up to six years. Cadila Healthcare would receive potential milestone payment of up to $300 million and royalties on sales upon the successful launch of any compounds derived from the research program.

Impact on Cadila Healthcare
Management has not disclosed the exact details of the deal in terms of financial implication and how and when company will get milestone payments, etc. However, seeing the potential milestone payment, we believe that this is a risk-reward sharing kind of a deal where Cadila Healthcare will be working with innovators as a development partner. Cadila Healthcare will bear the pre-clinical and early stage (Phase I & II) development cost, while the partner is responsible for late stage development. Inlieu of this, Cadila Healthcare will get milestone on successful competition of each stage and percentage royalty of global sales. Milestone amount will be higher in the later stage. We expect Cadila Healthcare to start work on this project from FY10E onwards.

To see full report: CADILA HEALTHCARE