UBS: Dr. Reddy's Labs: FY12 likely to be a strong year

FY12 likely to be a strong year
􀂄 Olanzapine and Ziprasidone exclusivity boost FY12 and FY13, respectively
We maintain our Buy rating on Dr Reddy’s and raise our price target from Rs1,500
to Rs1,800. We expect potential shared exclusivities on Zyprexa (Olanzapine) and
Geodon (Ziprasidone) to boost earnings in FY12 and FY13, respectively. Key
launches on the API side are expected to be Gemcitabine/ Clopidogrel in FY11/
FY12. We are 23%/20% ahead of consensus EPS estimates for FY12/13. Approval
of fondaparinux (Arixtra) would result in further upside to our FY12 estimate.
􀂄 Gap between management and street expectations implies upgrades
Management expects sales to ramp up to close to US$3bn by FY13 versus
consensus estimate of US$2.2bn (UBS estimate: US$2.31bn). We therefore expect
further earnings upgrades with improving visibility on new product launches.
Management continues to guide for strong US revenue momentum in H2FY11,
with the launch of 8-9 products, some of which may face only limited competition.
􀂄 Raising estimate for FY12, reducing estimate for FY11 on launch delays
We lower our FY11 estimates due to slower-than-expected ramp-up in Prilosec
OTC and a delay in the launch of Allegra D-12 and D-24 due to legal hurdles. We
raise our FY12 and FY13 EPS estimates as we incorporate Olanzapine and
Ziprasidone exclusivities. We revise our FY11/FY12 EPS estimates from
Rs69.39/Rs91.94 to Rs 65.12/Rs99.12.
􀂄 Valuation: maintain Buy, raise price target from Rs1,500 to Rs1,800
We derive our price target using DCF methodology explicitly forecasting longterm
valuation drivers using UBS’s VCAM tool. Our price target assumes a
WACC of 11%. Dr Reddy’s and Ranbaxy remain our preferred picks in the Indian
pharma space.