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Dr. Reddy's----------------------------------------------------------------------Maintain OUTPERFORM
Allegra OTC switch a setback
● We assume coverage of Dr. Reddy’s with an OUTPERFORM
rating, but reduce our target price to Rs1,760 (from Rs1,850).
● Sanofi has moved the Allegra products to the OTC market, implying
Dr. Reddy’s will have to stop selling Fexofenadine and Allegra D-24
in the prescription market by March 2011. Further, Allegra D-24 will
be sold as a behind-the-counter product, as it contains
Pseudoephedrine; so, market share gain could be slower for the
generics. Perrigo has guided for a March/May 2011 approval for the
OTC version, and we expect similar timelines for Dr. Reddy’s.
● Market share gains on Omeprazole OTC has been slower than
expected, as Dr. Reddy’s faces a trade-off between market share
gain and price erosion. The price erosion should be lower if Dr.
Reddy’s takes market share from the innovator than Perrigo.
● We value the base business at 21x FY12E at Rs1714/share and
FTF pipeline at Rs46/share for our target price of Rs1760. We cut
FY12-13E earnings by 14-9%, as we now model in a slower rampup of Omeprazole OTC and lower market share for Fexofenadine
when Dr. Reddy’s launches it in the OTC market
Allegra OTC switch a setback for Dr. Reddy’s
Dr. Reddy’s existing franchise of Fexofenadine and potential Allegra
D-24 opportunity have been impacted by Sanofi’s move to switch the
entire Allegra family of products to the OTC market. Although Dr.
Reddy’s has launched Allegra D-24 in the prescription market, but the
upside is limited, as Sanofi plans to launch the OTC version in March
2011 when Dr. Reddy’s will have to stop selling in the prescription
market. Perrigo expects to get approval for Allegra OTC between
March 2011 and end-May 2011. However, it does not expect the
opportunity to contribute significantly in 2011 and expects major
contributions in CY12 only. We expect the same timelines of approval
for Dr. Reddy’s too.
What works against Dr. Reddy’s is that Allegra D-24 will be sold as a
behind-the-counter product, as it contains Pseudoephedrine that
cannot be sold in the OTC market. This has important implications on
market share potential for Dr. Reddy’s for Allegra D-24. We expect
market share gain to be even slower in Allegra D-24. However, Dr.
Reddy’s has an advantage of no other generic competitions in the
near term on Allegra-D24. Overall, the Allegra OTC switch should lead
to muted earnings growth in 1H.
India: Channel feedback suggests distribution changes by
DRL were only partially successful
Dr. Reddy’s changed its distribution strategy from the push-based
system to the pull-based system last year. Although India sales
growth has picked up sharply over the past five quarters, our
discussions with the distributors suggest Dr. Reddy’s attempt was only
partially successful. Dr. Reddy’s attempt was to collect last month’s
sales data from the distributors and then use that data to supply drugs
to them. The attempt was only partially successful, as the distributors
did not like losing control over the inventory decisions to DRL.
Omeprazole OTC: Price erosion depends on whether DRL
takes market share from innovator or Perrigo
As Dr. Reddy’s and Perrigo are the only two players in the store brand
OTC market for Omeprazole, the price decline will be based on DRL’s
aspiration for market share. Perrigo has almost 40% market share
with sales of US$200 mn. The advantage DRL has over Perrigo is that
DRL’s version of Omeprazole is bioequivalent to that of the innovator,
while Perrigo’s version is a tablet and a 505 (b)(2) application.
A retailer is more interested in selling the store brand compared to the
innovator brand, as it makes higher margin on the private label.
Perrigo has been able to achieve only 40% market share so far. Thus,
by promoting Dr. Reddy’s product, if the retailer can switch customers
from innovator to DRL, we should not expect a significant price cut for
the private label. Otherwise, the only alternative Perrigo has to protect
its market share is to cut its prices. Our base case assumes a price
erosion of 35% and DRL’s market share of 25%, implying peak sales
of US$80 mn. We assume gross margin of 70% for DRL.
Russia: Concerns justified but market still attractive
After the imposition of price regulation on vital and essential drugs
(VED) in April 2010, concerns have emerged about the prospects of
the Russia market. The government has two objectives: (1) ensuring
that on the state-financed drugs, the currency risk is not taken by the
distributors and the maximum price for the government is fixed in the
rouble, and (2) strengthening the local pharma industry.
Almost 50% of DRL sales are affected by the VED regulation, as two
of its power brands, constituting 29% of FY10 Russian sales, are in
the VED list. For the market, prices for VED drugs were down about
9% YoY, while for non-VED drugs, prices were almost flat. Thus, in
total, prices for DRL’s portfolio in Russia were down 5% YoY (50%
portfolio impacted). Growth in Russia on the VED portfolio will largely
be volume growth and to maintain overall growth of the portfolio, Dr.
Reddy’s has started increasing its exposure to the OTC segment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dr. Reddy's----------------------------------------------------------------------Maintain OUTPERFORM
Allegra OTC switch a setback
● We assume coverage of Dr. Reddy’s with an OUTPERFORM
rating, but reduce our target price to Rs1,760 (from Rs1,850).
● Sanofi has moved the Allegra products to the OTC market, implying
Dr. Reddy’s will have to stop selling Fexofenadine and Allegra D-24
in the prescription market by March 2011. Further, Allegra D-24 will
be sold as a behind-the-counter product, as it contains
Pseudoephedrine; so, market share gain could be slower for the
generics. Perrigo has guided for a March/May 2011 approval for the
OTC version, and we expect similar timelines for Dr. Reddy’s.
● Market share gains on Omeprazole OTC has been slower than
expected, as Dr. Reddy’s faces a trade-off between market share
gain and price erosion. The price erosion should be lower if Dr.
Reddy’s takes market share from the innovator than Perrigo.
● We value the base business at 21x FY12E at Rs1714/share and
FTF pipeline at Rs46/share for our target price of Rs1760. We cut
FY12-13E earnings by 14-9%, as we now model in a slower rampup of Omeprazole OTC and lower market share for Fexofenadine
when Dr. Reddy’s launches it in the OTC market
Allegra OTC switch a setback for Dr. Reddy’s
Dr. Reddy’s existing franchise of Fexofenadine and potential Allegra
D-24 opportunity have been impacted by Sanofi’s move to switch the
entire Allegra family of products to the OTC market. Although Dr.
Reddy’s has launched Allegra D-24 in the prescription market, but the
upside is limited, as Sanofi plans to launch the OTC version in March
2011 when Dr. Reddy’s will have to stop selling in the prescription
market. Perrigo expects to get approval for Allegra OTC between
March 2011 and end-May 2011. However, it does not expect the
opportunity to contribute significantly in 2011 and expects major
contributions in CY12 only. We expect the same timelines of approval
for Dr. Reddy’s too.
What works against Dr. Reddy’s is that Allegra D-24 will be sold as a
behind-the-counter product, as it contains Pseudoephedrine that
cannot be sold in the OTC market. This has important implications on
market share potential for Dr. Reddy’s for Allegra D-24. We expect
market share gain to be even slower in Allegra D-24. However, Dr.
Reddy’s has an advantage of no other generic competitions in the
near term on Allegra-D24. Overall, the Allegra OTC switch should lead
to muted earnings growth in 1H.
India: Channel feedback suggests distribution changes by
DRL were only partially successful
Dr. Reddy’s changed its distribution strategy from the push-based
system to the pull-based system last year. Although India sales
growth has picked up sharply over the past five quarters, our
discussions with the distributors suggest Dr. Reddy’s attempt was only
partially successful. Dr. Reddy’s attempt was to collect last month’s
sales data from the distributors and then use that data to supply drugs
to them. The attempt was only partially successful, as the distributors
did not like losing control over the inventory decisions to DRL.
Omeprazole OTC: Price erosion depends on whether DRL
takes market share from innovator or Perrigo
As Dr. Reddy’s and Perrigo are the only two players in the store brand
OTC market for Omeprazole, the price decline will be based on DRL’s
aspiration for market share. Perrigo has almost 40% market share
with sales of US$200 mn. The advantage DRL has over Perrigo is that
DRL’s version of Omeprazole is bioequivalent to that of the innovator,
while Perrigo’s version is a tablet and a 505 (b)(2) application.
A retailer is more interested in selling the store brand compared to the
innovator brand, as it makes higher margin on the private label.
Perrigo has been able to achieve only 40% market share so far. Thus,
by promoting Dr. Reddy’s product, if the retailer can switch customers
from innovator to DRL, we should not expect a significant price cut for
the private label. Otherwise, the only alternative Perrigo has to protect
its market share is to cut its prices. Our base case assumes a price
erosion of 35% and DRL’s market share of 25%, implying peak sales
of US$80 mn. We assume gross margin of 70% for DRL.
Russia: Concerns justified but market still attractive
After the imposition of price regulation on vital and essential drugs
(VED) in April 2010, concerns have emerged about the prospects of
the Russia market. The government has two objectives: (1) ensuring
that on the state-financed drugs, the currency risk is not taken by the
distributors and the maximum price for the government is fixed in the
rouble, and (2) strengthening the local pharma industry.
Almost 50% of DRL sales are affected by the VED regulation, as two
of its power brands, constituting 29% of FY10 Russian sales, are in
the VED list. For the market, prices for VED drugs were down about
9% YoY, while for non-VED drugs, prices were almost flat. Thus, in
total, prices for DRL’s portfolio in Russia were down 5% YoY (50%
portfolio impacted). Growth in Russia on the VED portfolio will largely
be volume growth and to maintain overall growth of the portfolio, Dr.
Reddy’s has started increasing its exposure to the OTC segment.
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