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Dr Reddys has received the US approval for the much awaited fondaparinox, which is a positive
but already priced in, in our view. We attribute Rs4/sh as core EPS for FY12F. Management
guides for a phased sales ramp up due to the product complexity. We maintain Sell on weak
business-mix and rich valuations.
DRL finally gets fondaparinox approval; management indicates phased ramp up
DRL has finally received the much delayed approval for fondaparinox in US. We had recently
shifted our approval and launch assumption of this product from April 2012 to July 2012.
GSK had booked worldwide sales of US$480m in 2010 of which US sales were US$285m.
We have assumed c35% price erosion and 35% market share for DRL and have penciled in
revenues of US$52m in FY12 (July 2011-Mar 2012). We have built in 70% margin, tax rate of
20% and profit share of about 50% (as DRL is in partnership with Alchemia) which translates
into US$15m in PAT and Rs4 of EPS for FY12.
We have also built in European approval and launch in FY13 and expect cumulative (US+EU)
earnings accretion of US$35m and EPS accretion of Rs9 in FY13. If EU launch is delayed to
FY14, EPS accretion could be Rs6.5.
While we acknowledge that fondaparinox is a significant product for DRL, we highlight that we
have already built it in our forecasts (EPS of Rs4.1 in FY12 and Rs9.3 in FY13) and value it
as core earnings (unlike the 1x DCF based valuations of one-off opportunities).
We also highlight that management is guiding to a phased launch due to the complexity of the
product which could translate into a slower than expected ramp up in sales from this product.
Management has commented that "Dr. Reddy's will promptly execute a phased launch that
initially plays to our strengths in select wholesale and retail outlets, and subsequently
enhance share over time in the coming quarters".
Business-mix remains weak and headwinds persist
We reiterate that DRL's Pharma Services and Active Ingredients (PSAI) and Betapharm
businesses (together 34% of FY11 revenues) continue to face headwinds due to pricing
pressure.
The recent US FDA Import Alert regarding DRL's active pharmaceutical ingredients (API)
manufacturing unit in Mexico could hit the recovery of its PSAI business, in our view.
Domestic formulation revenues (16% of FY11 revenues) were also muted in 4QFY11 (5%
yoy) due to competition intensifying.
Russia/CIS (15% of revenues) could also face challenges due to the ongoing healthcare
reforms in Russia (the 2020 programme).
The US business (25%), which has been DRL's key growth driver, is now also facing
headwinds. Its track record in monetising products has recently been unimpressive, in our
view with delays in approval of gArixtra (approval received after much delay), plus reduced
upside potential from gAllegra D-24 (prescription switch to OTC).
US pipeline attractive, but priced in
We acknowledge that DRL has a robust ANDA pipeline. However, we believe that we have
already factored in the potential upside from most one-offs that we think have a reasonable
chance of monetisation:
Launched in FY11: gLotrel, gPrevacid, gPrograf, gAccolate, etc, which should continue to
provide a benefit in the next few years, although at a lower pace.
Launches in FY12F: gArixtra (fondaparinox), gAllegra D-24 OTC, gExelon, gClarinex and
gZyprexa
Launches in FY13F: gGeodon and gPropecia
We also factor in our DCF contribution for the opportunities not disclosed by the company,
such as gSeroquel, gAciphex, gLipitor etc.
Fondaparinox approval - an exit opportunity?
The stock has already moved up 3% in response to this launch news. The fondaparinox
approval is a positive, but has already been priced in, in our view. Our SOTP-based TP of
Rs1,360 is derived by valuing its core business at Rs1,309 (FY12F PE of 21.4x, in) and its
Para-IV pipeline at Rs51. We reiterate our Sell rating on a weak business mix and rich
valuations.
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