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Dr Reddy (REDY.BO)
Alert: Takeaways from India Pharma Conference, December 6-7
Takeaways from Mumbai — Dr Reddy presented at our India Pharma MiniConference in Mumbai. Here are our key takeaways.
Guidance Update — Dr Reddy's continues to work towards targeted revenues of
US$3bn by FY13 (does not include any material 180 days upside). While the
company does not have complete visibility on the final target yet, it will not
overreach or try to achieve the targeted number at any cost. The focus remains on
achieving growth while improving return ratios. It remain quite confident on its US
generics and branded businesses while the PSAI & German businesses remain
challenging. Initiatives such as the recent acquisition of GSK's penicillins biz will
also help towards achieving the target.
Update on Key Product Opportunities — a) Fondaparinux remains confident of
approval in early CY11; b) Omeprazole OTC is gaining traction, should exit FY11
with an annualised run rate of cUS$50m; c) Allegra D24 is confident of a
favourable verdict in Jan'11; d) Allegra D12 to be a very crowded market post
Impax's exclusivity; e) Lansoprazole has decent traction post launch, to reflect in
numbers over the next few quarters; f) Olanzapine could be a key opportunity in
FY12.
Update on Key Markets / Businesses — a) India - benefits of restructuring visible,
growth rates to remain high; b) US generics - biz in good shape, limited
competition products to add to growth momentum; c) Germany - has bid more
aggressively for AOK tenders (to open in Jan '11) this time but the market remains
challenging, worst however appears behind; d) Russia - remains a good market,
pricing regulations have not had a material impact; e) PSAI - custom biz has been
hurt & APIs sluggish, growth to pick up in FY12/13, on several interesting
launches.
Other Takeaways — a) Biosimilars: will launch its fourth product in India shortly,
also targeting a launch in the Russia / CIS, may look to partner for regulated
markets at some stage; b) GSK Alliance - unlikely to be material in the near term
but a key growth driver over 3-4 years; c) Japan - is an interesting market but no
intent to make any large inorganic move on this front.
Dr Reddy
Valuation
Our Rs1,810 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 March 12E earnings, we value DRL's
base business at Rs1,735. We continue to 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 Rs1,810.
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 key product approvals & current high valuations.
Downside risks to our target price include: (1) Any delay in approval for
fondaparinux (Arixtra) could entail downward revision of 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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