Citi on Dr. Reddy:: Riding the Global Generics Wave

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Riding the Global Generics Wave
 Business Snapshot – DRL is a leading generics company, with a primary
focus on international markets. After starting as a bulk-drugs player in 1984,
it has moved up the value chain into formulations and has built a strong
presence in the US as well as certain key emerging markets. It is one of the
few Indian companies to have a large third-party API business as well as a
reasonable biosimilars pipeline. Besides its own front-end initiatives, it has a
deal with GSK Plc - the latter would distribute DRL’s products in several
emerging markets.


 Latest Quarterly Performance – Topline growth was driven by higher margin
businesses: India (+25% YoY), Russia (+23% YoY) formulations & limited
competition products (generic Prograf, Lotrel) in the US. On the other hand,
lower gross margin businesses such as PSAI (-14% YoY) & Betapharm (-
26% YoY) remained sluggish. Recurring net income was up by +3% YoY and
+37% QoQ primarily driven by lower effective tax rate (c10% - higher
weighted deduction for R&D) & higher gross margins (up 592bps YoY –
better mix).

 Key Catalysts / Issues – a) Key approvals in the US market – mainly
fondaparinux, Allegra D-24 & Allegra D-12; b) Further updates on the US FTF
/ Para IV pipeline; c) Germany – outcome of the next round of AOK tenders;
d) Pricing regulations in the Russian market; e) Scale up in revenues from
the GSK alliance for emerging markets; f) Progress on initiatives to tap the
biosimilars opportunity in emerging and developed markets.

 Valuations: Premium Levels Should Sustain – DRL is one of the best
positioned firms to capitalize on the multiple growth drivers for pharma over
the next 3-4 years. A strong US pipeline (including several P-IV & niche
oppys), an emerging markets alliance with GSK Plc & well established biz in
India, Russia/CIS & Germany would hold it in good stead. It is also one of the
few Indian firms to have made some headway in biosimilars. These factors
should help sustain its premium valuations (c20xFY12E core EPS, adjusted
for its US P-IV pipeline value of Rs75/sh) in our view.