Visit http://indiaer.blogspot.com/ for complete details Dr Reddy : Fondaparinux Update & 2Q Preview
We now believe that REDY’s generic fondaparinux launch in the US may slip into
4QFY11, as against our assumption of a 3Q launch. However, any shortfall on this
count could be made up if FDA approval for generic lansoprazole (attractive
limited competition opportunity) comes through soon. We expect developments on
these products along with 2Q results due next week to be the key things to watch
out for in the near term. Maintain Hold (2M).
indicated that the facility in which syringes are filled with fondaparinux will be
inspected by the FDA in Nov ‘10. While REDY manufactures the API, the filling is
done in an outside facility. REDY confirmed that fondaparinux is one of the
products covered under this inspection. We believe that approval & launch may
thus get pushed out to 4Q – we have built in upside from 3Q.
Prevacid (lansoprazole) could compensate: REDY has been awaiting approval and
we expect this to come through soon. Lansoprazole is an attractive opportunity.
Despite being genericised almost a year back, market size is healthy at cUS$2bn,
with only 3 generic players in the fray. If REDY gets approval without too much
delay, this should compensate for lower FY11 sales of fondaparinux.
2Q Preview: Stronger than 1Q: REDY reports next week. We expect it to improve on
its subdued 1Q numbers, with sales, operating income & adjusted net income of
Rs20.8bn (+13% YoY, +24% QoQ), Rs3.1bn (+6% YoY, +16% QoQ) & Rs2.4bn
(+6% YoY, +15% QoQ) in 2Q. Higher sales in generic Lotrel (amlodipine besylate
plus benazepril HCl) & Prograf (tacrolimus) would be the key drivers, along with
continued strong growth in India & Russia/CIS.
Valuation
Our Rs1,350 target price for DRL is based on a sum-of-the-parts valuation
approach. We use a target multiple of 20x to value DRL’s core earnings. This is in
line with its historical trading range. At 20x June 11E earnings, we value DRL's
base business at Rs1,275. We value DRL's Para IV pipeline separately at Rs75/sh,
based on a probability adjusted DCF valuation. We use a range of probabilities
from 25% to 90%, based on individual product dynamics, and a discount factor of
12.5% for the opportunities being targeted over the next few years. Cumulatively,
we arrive at a target price of Rs1,350.
Risks
We rate DRL Medium Risk, as against Low risk suggested by our quant-based risk
rating system. We believe that the higher risk rating is justified, given the
uncertainty over timing of certain key product approvals. Downside risks to our
target price include: (1) Any delay in approval for fondaparinux (Arixtra) could
entail downward revision of FY11 estimates; (2) Patent challenges are win-lose
situations and often cause stock-price volatility; and (3) Any rise in regulatory
pressure on pricing / competition in Russia/CIS. Key upside risks to our target
price include: (1) better-than-expected performance in Germany either due to
lower pricing pressure or higher savings on sourcing from India could lead to
upside to our earnings estimates and target price; (2) Success in either its NCE
R&D program or any of its patent challenges could act as a positive catalyst.
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