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Dr. Reddy's Laboratories- Thesis intact – back to Outperform
Event
DRRD reported 3Q FY11 numbers with revenue at Rs19bn (up 10% YoY) and
PAT at Rs2.7bn (up 18% YoY). EBITDA margin at 21% was flat YoY due to
higher SG&A spend which was boosted by an one-time expense of US $9m.
This was the main reason for PAT being lower than our estimate of Rs3.1b.
DRRD has corrected ~15% since 16 Dec 2010 (see our note, Dr. Reddy’s
Laboratories: Pause for breath – awaiting Fonda). Correction does provide an
entry opportunity given the strong growth ahead. Maintain our TP of Rs1775 &
upgrade to OP.
Impact
Sequential growth in US playing out: DRRD posted US$106m sales in US
(up 60% YoY, 8% QoQ, our estimate was US$110m). Ramp-up of market
share in key products (Prograf & Omeprazole) and new launches (Prevacid &
Accolate) helped built the momentum. We estimate US$115m sales in
4QFY11 driven by higher market share in new launches. Fonda launch in
4QFY11 could pose upside risk to estimates (we now build launch in
1QFY12). Given the settlement of Accolate litigation with the innovator and
increasing comfort on ability of DRRD to gain market share in Omeprazole
(OTC product) we now include these products in base business.
Allegra D24 ruling is expected in 4QFY11. Sanofi moves the product from Rx
to OTC, starting Mar-11. While DRRD is well positioned to monetize the asset
on the OTC side the opportunity might not be as lucrative as it was being just
an Rx product. We do not build upside from this product currently.
Other markets: Russia (up 7% YoY), India (up 14% YoY) and RoW (up 6%
YoY) had moderate growth this quarter due to a high base effect and
seasonality. However 9M YTD Russia is up 22%, India is up 19% and RoW is
up 22%, very much in-line with our full year estimates. Europe business
declined 33% on the back of price erosions caused by tenders in Germany.
However for 9MFY11 it’s down 14% vs. our full year estimate of 12% decline.
Margin was impacted by higher one- time SG&A expenses (~ US $9m). This
was primarily on account of higher one-time OTC advertisement spending in
Russia, Beta-pharma loan refinancing charge and litigation charge.
Earnings and target price revision
We have adjusted our reported EPS for FY11/FY12/13E to Rs68/103/123 from
Rs.74/105/123. Slower ramp-up in US for Prevacid and our deferment of Fonda
launch estimate to 1QFY12 are the major reason for lower FY11E EPS.
Price catalyst
12-month price target: Rs1,775.00 based on a Sum of Parts methodology.
Catalyst: 1) Fonda approval 2) Allegra D24 litigation win
Action and recommendation
Post the recent correction, DRRD is now trading at reasonable valuation of
~17.8x FY12E earnings. We upgrade to OP and maintain our TP of Rs177
Conference Call Key Takeaways
1. SG&A expenses was impacted by (one time US$9m) because of higher OTC spend, Beta-pharm
refinancing non cash charge, high legal cost in US (related to Allegra D-24)
2. Management guided for R&D expenses to be of the order of 7-7.5% of Sales going forward.
Higher R&D expenses are on account of higher R&D activities in the areas of biosimilars and
NCE/NBE pipeline.
3. Low Effective Tax rate (5.3%) in 3QFY11 was explained by higher R&D expense (weighted tax
deduction benefit) and inventory built-up in US because of new launches (tax adjustment for intercompany transfer). Management guided for FY11 effective tax rate of 11-12%
4. According to management India business grew at 14% YoY (compared to >20% in 1HFY11)
because of seasonal effect.
5. On US limited competition opportunities: Allegra D-24 case hearing is scheduled on 31
st
of
Jan’2011. Fondaparinux: both the plants have been inspected and DRRD is awaiting an approval.
DRRD strategy to gain market share on key products is playing out very well. Market share of
Fexofenadine ~21%; Omeprazole ~16%; Ciprofloxacin ~21%; Prograf ~18%. Management
anticipates Prevacid and Accolate to ramp up market share in 4QFY11.
6. PSAI business: API business which contributes ~65% of the business grew sequentially on the
back of new product launches. Also, strong order book built-up and capacity (in place) to help
grow the business in the next 4-8 quarters. Pharmaceutical services business to remain weak for
few more quarters.
7. In the Biosimilar space, Reditux has become the top 5 brands selling in India for DRRD. Also, 4th biosimilar product would be launched by the company in India shortly. Biosimilar portfolio has
grown 18% YoY in India.
8. Management indicated that recent Augmentin facility acquired from GSK will get integrated in
FY12.
Global Generics
Revenues from Global Generics segment came at Rs13.6bn (up 16% YoY) in 3QFY11 largely driven
by US sales (up 60% YoY).
North America: Revenues from North America came at Rs4.8bn (US$106m) in 3QFY11 vs Rs3.0bn
in 3QFY10 on the back of market share expansion in existing vertically integrated products and new
product launches. As at 31 Dec 2010, total cumulative ANDA filings are 165. Total ANDAs pending
approval at the USFDA are 74, of which 32 are Para IVs and 12 are FTFs.
Europe: Revenues from Europe came at Rs2.1bn in 3QFY11 vs Rs2.6bn in 3QFY10. Germany
business declined by 33% YoY to Rs1.4bn in 3QFY11, on the back of price erosions caused by
tenders. Revenues from Rest of Europe grew by 39% to Rs744m in 3QFY11.
Russian & CIS: Revenues from Russia & Other CIS markets grew by 4% to Rs2.9bn in 3QFY11.
Revenues in Russia grew by 7% YoY at Rs2.4bn in 3QFY11. Growth on high base of previous year
is driven by volume increase across key brands and new launches in the last twelve months.
Secondary prescription sales grew by 21% vs industry growth of 8% (Source: Pharmexpert AprilNovember 2010). Revenues in Other CIS markets decreased by 11% to Rs434m in 3QFY11.
India: Revenue grew by 14% YoY at Rs3.0bn in 3QFY11, which is largely led by volume growth of
8% existing products and new products contribution of 6%. 16 new products launched during the
quarter.
Pharmaceutical Services and Active Ingredients (PSAI)
Revenues from PSAI are at Rs5.0bn ($111m) in 3QFY11, sequential growth of 8% on the back of
new launches in API segment. During the quarter, 9 DMFs were filed globally. The cumulative DMF
filings as of Dec-10 are 436.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Dr. Reddy's Laboratories- Thesis intact – back to Outperform
Event
DRRD reported 3Q FY11 numbers with revenue at Rs19bn (up 10% YoY) and
PAT at Rs2.7bn (up 18% YoY). EBITDA margin at 21% was flat YoY due to
higher SG&A spend which was boosted by an one-time expense of US $9m.
This was the main reason for PAT being lower than our estimate of Rs3.1b.
DRRD has corrected ~15% since 16 Dec 2010 (see our note, Dr. Reddy’s
Laboratories: Pause for breath – awaiting Fonda). Correction does provide an
entry opportunity given the strong growth ahead. Maintain our TP of Rs1775 &
upgrade to OP.
Impact
Sequential growth in US playing out: DRRD posted US$106m sales in US
(up 60% YoY, 8% QoQ, our estimate was US$110m). Ramp-up of market
share in key products (Prograf & Omeprazole) and new launches (Prevacid &
Accolate) helped built the momentum. We estimate US$115m sales in
4QFY11 driven by higher market share in new launches. Fonda launch in
4QFY11 could pose upside risk to estimates (we now build launch in
1QFY12). Given the settlement of Accolate litigation with the innovator and
increasing comfort on ability of DRRD to gain market share in Omeprazole
(OTC product) we now include these products in base business.
Allegra D24 ruling is expected in 4QFY11. Sanofi moves the product from Rx
to OTC, starting Mar-11. While DRRD is well positioned to monetize the asset
on the OTC side the opportunity might not be as lucrative as it was being just
an Rx product. We do not build upside from this product currently.
Other markets: Russia (up 7% YoY), India (up 14% YoY) and RoW (up 6%
YoY) had moderate growth this quarter due to a high base effect and
seasonality. However 9M YTD Russia is up 22%, India is up 19% and RoW is
up 22%, very much in-line with our full year estimates. Europe business
declined 33% on the back of price erosions caused by tenders in Germany.
However for 9MFY11 it’s down 14% vs. our full year estimate of 12% decline.
Margin was impacted by higher one- time SG&A expenses (~ US $9m). This
was primarily on account of higher one-time OTC advertisement spending in
Russia, Beta-pharma loan refinancing charge and litigation charge.
We have adjusted our reported EPS for FY11/FY12/13E to Rs68/103/123 from
Rs.74/105/123. Slower ramp-up in US for Prevacid and our deferment of Fonda
launch estimate to 1QFY12 are the major reason for lower FY11E EPS.
Price catalyst
12-month price target: Rs1,775.00 based on a Sum of Parts methodology.
Catalyst: 1) Fonda approval 2) Allegra D24 litigation win
Action and recommendation
Post the recent correction, DRRD is now trading at reasonable valuation of
~17.8x FY12E earnings. We upgrade to OP and maintain our TP of Rs177
Conference Call Key Takeaways
1. SG&A expenses was impacted by (one time US$9m) because of higher OTC spend, Beta-pharm
refinancing non cash charge, high legal cost in US (related to Allegra D-24)
2. Management guided for R&D expenses to be of the order of 7-7.5% of Sales going forward.
Higher R&D expenses are on account of higher R&D activities in the areas of biosimilars and
NCE/NBE pipeline.
3. Low Effective Tax rate (5.3%) in 3QFY11 was explained by higher R&D expense (weighted tax
deduction benefit) and inventory built-up in US because of new launches (tax adjustment for intercompany transfer). Management guided for FY11 effective tax rate of 11-12%
4. According to management India business grew at 14% YoY (compared to >20% in 1HFY11)
because of seasonal effect.
5. On US limited competition opportunities: Allegra D-24 case hearing is scheduled on 31
st
of
Jan’2011. Fondaparinux: both the plants have been inspected and DRRD is awaiting an approval.
DRRD strategy to gain market share on key products is playing out very well. Market share of
Fexofenadine ~21%; Omeprazole ~16%; Ciprofloxacin ~21%; Prograf ~18%. Management
anticipates Prevacid and Accolate to ramp up market share in 4QFY11.
6. PSAI business: API business which contributes ~65% of the business grew sequentially on the
back of new product launches. Also, strong order book built-up and capacity (in place) to help
grow the business in the next 4-8 quarters. Pharmaceutical services business to remain weak for
few more quarters.
7. In the Biosimilar space, Reditux has become the top 5 brands selling in India for DRRD. Also, 4th biosimilar product would be launched by the company in India shortly. Biosimilar portfolio has
grown 18% YoY in India.
8. Management indicated that recent Augmentin facility acquired from GSK will get integrated in
FY12.
Global Generics
Revenues from Global Generics segment came at Rs13.6bn (up 16% YoY) in 3QFY11 largely driven
by US sales (up 60% YoY).
North America: Revenues from North America came at Rs4.8bn (US$106m) in 3QFY11 vs Rs3.0bn
in 3QFY10 on the back of market share expansion in existing vertically integrated products and new
product launches. As at 31 Dec 2010, total cumulative ANDA filings are 165. Total ANDAs pending
approval at the USFDA are 74, of which 32 are Para IVs and 12 are FTFs.
Europe: Revenues from Europe came at Rs2.1bn in 3QFY11 vs Rs2.6bn in 3QFY10. Germany
business declined by 33% YoY to Rs1.4bn in 3QFY11, on the back of price erosions caused by
tenders. Revenues from Rest of Europe grew by 39% to Rs744m in 3QFY11.
Russian & CIS: Revenues from Russia & Other CIS markets grew by 4% to Rs2.9bn in 3QFY11.
Revenues in Russia grew by 7% YoY at Rs2.4bn in 3QFY11. Growth on high base of previous year
is driven by volume increase across key brands and new launches in the last twelve months.
Secondary prescription sales grew by 21% vs industry growth of 8% (Source: Pharmexpert AprilNovember 2010). Revenues in Other CIS markets decreased by 11% to Rs434m in 3QFY11.
India: Revenue grew by 14% YoY at Rs3.0bn in 3QFY11, which is largely led by volume growth of
8% existing products and new products contribution of 6%. 16 new products launched during the
quarter.
Pharmaceutical Services and Active Ingredients (PSAI)
Revenues from PSAI are at Rs5.0bn ($111m) in 3QFY11, sequential growth of 8% on the back of
new launches in API segment. During the quarter, 9 DMFs were filed globally. The cumulative DMF
filings as of Dec-10 are 436.
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