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The US pipeline remains robust and we expect domestic business to improve, but the overall mix
remains unattractive to us – c38% faces headwinds. Despite aggressively factoring into our
model one-offs in the US, we still find valuations unattractive. Sell with a reduced target price of
Rs1,355 (from Rs1,460).
Key beneficiary of US drugs going off patent, but we believe this is already priced in
We believe Dr Reddy’s (DRL) will be a key beneficiary among India pharmaceuticals of US drugs
going off patent. We like its limited competition opportunity pipeline in the US given our high
certainty of it being monetised with no US FDA overhang. We factor into our model potential
upside from one-offs that we think have a reasonable chance of monetisation - generic Exelon,
generic Clarinex and generic Zyprexa in FY12F; generic Geodon and generic Propecia in FY13F
(Table 1). Our valuation factors in upside from potential one-offs not yet disclosed by DRL. We
therefore believe that chances of positive surprises are low.
Unattractive business mix, volatility in payoffs from US pipeline are key concerns
The company derives only c40% of its FY11F revenues from India and the US, our preferred
markets. We believe DRL’s PSAI (Pharmaceutical Services and Active Ingredients) and Europe
(primarily Betapharm) businesses, which cumulatively represent c38% of FY11F revenues, will
continue to face pricing pressure headwinds. Dr Reddy’s should be able to generate high growth
from Russia/CIS (15% of its FY11F revenues) markets, but concerns about healthcare reforms
could lead to lower-than-expected upside. Its ANDA pipeline also disappointed us recently
(delayed approval of generic Arixtra by the US FDA, shift of generic Allegra D-24 prescriptions to
OTC by innovative pharmaceutical companies, unexpected entry of authorised generic Accolate).
Any similar disappointments could negatively impact our earnings forecasts, as we have
aggressively factored its pipeline into our forecasts.
Despite factoring in US pipeline, the stock appears expensive; maintain Sell
Lower-than-expected core business performance results in a 9% cut to our FY12F earnings, but
inclusion of one-off opportunities results in a 5% increase in overall EPS. We value DRL’s core
business at Rs1,308ps (21.4x FY12F core EPS – at a par to the sector) and its Para IV pipeline
at Rs48ps, which results in a 7% cut in our target price to Rs1,355. With 13% potential downside
from current levels, we retain our Sell rating on the stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The US pipeline remains robust and we expect domestic business to improve, but the overall mix
remains unattractive to us – c38% faces headwinds. Despite aggressively factoring into our
model one-offs in the US, we still find valuations unattractive. Sell with a reduced target price of
Rs1,355 (from Rs1,460).
Key beneficiary of US drugs going off patent, but we believe this is already priced in
We believe Dr Reddy’s (DRL) will be a key beneficiary among India pharmaceuticals of US drugs
going off patent. We like its limited competition opportunity pipeline in the US given our high
certainty of it being monetised with no US FDA overhang. We factor into our model potential
upside from one-offs that we think have a reasonable chance of monetisation - generic Exelon,
generic Clarinex and generic Zyprexa in FY12F; generic Geodon and generic Propecia in FY13F
(Table 1). Our valuation factors in upside from potential one-offs not yet disclosed by DRL. We
therefore believe that chances of positive surprises are low.
Unattractive business mix, volatility in payoffs from US pipeline are key concerns
The company derives only c40% of its FY11F revenues from India and the US, our preferred
markets. We believe DRL’s PSAI (Pharmaceutical Services and Active Ingredients) and Europe
(primarily Betapharm) businesses, which cumulatively represent c38% of FY11F revenues, will
continue to face pricing pressure headwinds. Dr Reddy’s should be able to generate high growth
from Russia/CIS (15% of its FY11F revenues) markets, but concerns about healthcare reforms
could lead to lower-than-expected upside. Its ANDA pipeline also disappointed us recently
(delayed approval of generic Arixtra by the US FDA, shift of generic Allegra D-24 prescriptions to
OTC by innovative pharmaceutical companies, unexpected entry of authorised generic Accolate).
Any similar disappointments could negatively impact our earnings forecasts, as we have
aggressively factored its pipeline into our forecasts.
Despite factoring in US pipeline, the stock appears expensive; maintain Sell
Lower-than-expected core business performance results in a 9% cut to our FY12F earnings, but
inclusion of one-off opportunities results in a 5% increase in overall EPS. We value DRL’s core
business at Rs1,308ps (21.4x FY12F core EPS – at a par to the sector) and its Para IV pipeline
at Rs48ps, which results in a 7% cut in our target price to Rs1,355. With 13% potential downside
from current levels, we retain our Sell rating on the stock.
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