Dr. Reddy's Laboratories -Strengthening Derma Franchise:: Macquarie Research,

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Dr. Reddy's Laboratories
Strengthening Derma Franchise
Event
 Promius Pharma, an affiliate of DRRD, has agreed to acquire Cloderm®
(clocortolone pivalate 0.1%) cream from Valeant. Under the agreement,
PromiusTM Pharma will make an upfront payment and pay future royalties as
the consideration for the right to manufacture, distribute and market Cloderm®
Cream in the US, effective immediately.

Impact
 DRRD has not disclosed the financial terms. It is unlikely they would have
paid more than 2x to 3x Sales. Cloderm currently has annual sales of
~US$11m in US. It is a topical mid potent steroid product indicated for the
relief of the inflammatory and pruritic manifestations of corticosteroidresponsive
dermatoses. The market size is around US $150m with around
four players present. Cloderm Cream is available in a 45-gram and 90-gram
tube, and in a 30-gram or 75-gram pump, by prescription only.
 DRRD’s derma-specialty business is called “Promius Pharma” and it has inlicensed
products and a small field-force of around 50 sales-reps. The current
portfolio of Promius is around US$20m in sales & includes:
 EpiCeram® Emulsion: a novel prescription therapy for the treatment of
atopic dermatitis, a skin disease that affects ~ 15m people in
the US, representing an addressable market size of US$400m.
 PromiSeb™ Cream for seborrheic dermatitis
 Scytera™ Foam for psoriasis.
 The US dermatology market is estimated at US$10bn and it has experienced
growth of 10% pa for last two years. This is a segment that represents an
opportunity for the company to build a predictable revenue stream through
brands, and many firms are looking to obtain a piece of the derma space.
Earnings and target price revision
 No change
Price catalyst
 12-month price target: Rs1,840.00 based on a Sum of Parts methodology.
 Catalyst: 1) Fonda approval 2) OTC switch approval for it’s Allegra D24 ANDA
Action and recommendation
 DRRD remains our preferred large-cap play among the Indian pharma names.
DRRD is now trading at reasonable valuation of ~17x FY12E earnings
adjusted for exclusivity value. OP maintained with TP of Rs1840.