Visit http://indiaer.blogspot.com/ for complete details DR REDDY’S LABS: Receives approval for generic Prevacid; Low competition market; One-time PAT upside of Rs1b for FY12
Event: Dr. Reddy’s Labs (DRRD IN, Mkt Cap US$6b, CMP Rs1,585, Buy) has received final US FDA approval for Lansoprazole delayed-release capsules (Takeda’s US$2.7b anti-ulcer brand in the US). DRL has already launched the product in the US market.
Impact
- As of now this seems like a low-competition opportunity for DRL with only three other generic players in the market – Teva, Sandoz & Mylan. A complex bio-equivalence process has ensured that the market has remained less competitive even post genericization in Nov-2009.
- There is less likelihood of any other new generic player entering the market over the next 18 months.
- All these three generic players have entered in the market much before DRL and hence have the early-launch advantage implying that the market share gain for DRL will be gradual.
- We expect DRL to garner 5% market share in FY11 and gradually increase it to about 10% for FY12 in this market.
- We estimate one-time PAT for DRL of Rs249m in FY11 and Rs1b in FY12.
Patent challenge/low-competition opportunities in US gaining strength
- DRL management has been guiding for launch of at least one patent challenge / low-competition product in the US every year for the next few years. Overall, DRL has a pipeline of 12 FTFs targeting innovator market size of ~US$9b.
- A combination of scale-up in existing patent challenge / low-competition products coupled with newer opportunities will help the company achieve revenues of US$1b by FY13 in the US market.
- Despite the initial set-back for Allegra D-24, management continues to believe that the company will be able to reverse the adverse lower court ruling in the appeals court. It believes that it has a strong IPR position for this product which will help it get a favorable ruling (expected by Dec-10). This could raise our estimate of one-time PAT contribution for FY11 and FY12.
Valuation and view
- Traction in the branded formulations and US businesses, and focus on improving profitability will be the key growth drivers for DRL over next two years.
- We estimate core EPS of Rs48.7 for FY11 and Rs59.3 for FY12, adjusting for the impact of the proposed bonus debentures. We expect core EPS CAGR of 21% for FY08-12 (FY09/10 EPS suffered due to Betapharm write-offs). Including upsides from Para-IV / low-competition opportunities, we expect EPS of Rs61.8 for FY11 and Rs96.1 for FY12.
- Our core estimates exclude the upsides from patent challenges / low-competition opportunities in the US (current DCF value of Rs45/share for visible opportunities).
- DRL stock trades at 31.1x FY11E and 25.5x FY12E core earnings.
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