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UBS Investment Research
Dr. Reddy's Labs
M gmt. reiterates strong growth outlook
Event: Meeting with the CFO, growth outlook remains strong
Mgmt. continued to confidently reiterate strong growth outlook for the co. US
pipeline remains strong with 10-15 launches likely in both FY12 and FY13. Mgmt.
remains confident that some of these products will remain limited competition. Co.
expects Fondaparinux to fully ramp up only in FY13. Focus continues to remain on
filing more limited competition products.
Impact: Maintain ests; expect a strong H2FY12
We maintain our est. as along with growth, cos. will ramp up investments in R&D
(proprietary products and biosimilars), as well as continue to make more mktg.
investments in Russia OTC and India business. H2FY12 should be strong driven
by US with new customer orders at Shreveport facility, ramp up of Bristol facility
and Fondaparinux, Allegra D-24 in addition to Zyprexa exclusivity.
Action: Maintain Buy, Valuations remain attractive
We maintain our Buy on the stock given strong near term earnings growth outlook
and reasonable valuations. Dr Reddy’s remains our preferred pick in pharma space
along with Ranbaxy. We believe strong US base business growth along with
improving visibility on future US launches will continue to drive the stock.
Valuation: Trading at 15xFY13E PE, PT Rs 1,850
We derive our PT from a DCF-based methodology and explicitly forecast long
term valuation drivers using UBS’s VCAM tool. We assume a WACC of 11%.
We met with Dr Reddy’s CFO and the IR team for a detailed discussion on co.
outlook. Mgmt. seems fairly confident on growth outlook till FY14 given strong
US pipeline. We believe the stock remains attractive at current valuations at 15x
FY13. Key takeaways from our discussion are as follows:
US
Continues to focus on limited competition products in the beyond FY13
timeframe. Believes they have a strong pipeline and will potentially make
some disclosure on the same by next year (still thinking on how best to
communicate).
Fonda likely to ramp up fully only in FY13. Believe they have a strong cost
position and they will win market share from AG once they are fully up and
running.
The Shreveport facility in the US has also won a couple of new orders from
customers which will help drive significant growth from H2FY12.
FY13 – Fondaparinux, Lansoprazole, Omeprazole Mg, Tacrolimus should
continue to drive growth along with potential Atorvastatin generic and
Ziprasidone exclusivity. Co. expects to launch 10-15 products in FY13.
Focusing on injectables in the Oncology space. May go after other products
in the Fondaparinux class.
US Speciality – Cloderm cream has a 4 year pay back (Co. paid US$36mn
for ~US$10 mn in brand sales). Co. has reduced sales force to some extent.
No major scale up planned till pipeline approvals come through.
India
Sounds modest on domestic market growth outlook. Believe pricing pressure
will intensify.
However, co. working hard on improving effectiveness of sales force.
Believe growth should return to about15%YoY by Q3/Q4FY12
Russia
Co. spending ~US$20mn p.a. on the OTC portfolio. Believes growth will follow.
Growth in OTC portfolio will derisk potential risk in the Rx business. Continue
to look for alliance partners with strong brands to further augment Russia
business. Expect to launch biosimilars in Russia by 2014.
Margin Outlook
Margins should clearly improve in the US business with sharp increase in
revenues. However, at the corporate level it may be partly used into spending on
1) Russia OTC, 2) Proprietary products and biosimilars research and 3) currently
in the India business turnaround.
Dr. Reddy's Labs
Founded as a bulk drug firm in the 1980s, Dr Reddy's Labs (DRL) is now an
integrated company with a presence in the domestic and global formulation
segments with FY10 revenue of Rs69.9bn. Pharmaceutical services & active
ingredients made up 30% of sales in FY10 and formulations 70%. DRL derives
14% of sales from formulations sold in India, 14% from Europe and 25% from
the US, and 17% from finished dosages sold in the RoW. The remaining 30%
comes from pharmaceutical services & active ingredients. R&D is focused on
metabolic disorders, cardiovascular indications, anti-infectives and antiinflammation.
Statement of Risk
We believe risks include regulatory risks, FDA approval, timing of approvals,
litigation (including the appeal process), accounting/disclosure, and product
pricing risk from generics competition. Pricing pressure in the US market
because of increased competition may continue. Margin pressure on account of
appreciation of the rupee could also negatively impact earnings. Dr Reddy’s also
has high exposure to the API segment where margins are more volatile than the
formulations segment.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Dr. Reddy's Labs
M gmt. reiterates strong growth outlook
Event: Meeting with the CFO, growth outlook remains strong
Mgmt. continued to confidently reiterate strong growth outlook for the co. US
pipeline remains strong with 10-15 launches likely in both FY12 and FY13. Mgmt.
remains confident that some of these products will remain limited competition. Co.
expects Fondaparinux to fully ramp up only in FY13. Focus continues to remain on
filing more limited competition products.
Impact: Maintain ests; expect a strong H2FY12
We maintain our est. as along with growth, cos. will ramp up investments in R&D
(proprietary products and biosimilars), as well as continue to make more mktg.
investments in Russia OTC and India business. H2FY12 should be strong driven
by US with new customer orders at Shreveport facility, ramp up of Bristol facility
and Fondaparinux, Allegra D-24 in addition to Zyprexa exclusivity.
Action: Maintain Buy, Valuations remain attractive
We maintain our Buy on the stock given strong near term earnings growth outlook
and reasonable valuations. Dr Reddy’s remains our preferred pick in pharma space
along with Ranbaxy. We believe strong US base business growth along with
improving visibility on future US launches will continue to drive the stock.
Valuation: Trading at 15xFY13E PE, PT Rs 1,850
We derive our PT from a DCF-based methodology and explicitly forecast long
term valuation drivers using UBS’s VCAM tool. We assume a WACC of 11%.
We met with Dr Reddy’s CFO and the IR team for a detailed discussion on co.
outlook. Mgmt. seems fairly confident on growth outlook till FY14 given strong
US pipeline. We believe the stock remains attractive at current valuations at 15x
FY13. Key takeaways from our discussion are as follows:
US
Continues to focus on limited competition products in the beyond FY13
timeframe. Believes they have a strong pipeline and will potentially make
some disclosure on the same by next year (still thinking on how best to
communicate).
Fonda likely to ramp up fully only in FY13. Believe they have a strong cost
position and they will win market share from AG once they are fully up and
running.
The Shreveport facility in the US has also won a couple of new orders from
customers which will help drive significant growth from H2FY12.
FY13 – Fondaparinux, Lansoprazole, Omeprazole Mg, Tacrolimus should
continue to drive growth along with potential Atorvastatin generic and
Ziprasidone exclusivity. Co. expects to launch 10-15 products in FY13.
Focusing on injectables in the Oncology space. May go after other products
in the Fondaparinux class.
US Speciality – Cloderm cream has a 4 year pay back (Co. paid US$36mn
for ~US$10 mn in brand sales). Co. has reduced sales force to some extent.
No major scale up planned till pipeline approvals come through.
India
Sounds modest on domestic market growth outlook. Believe pricing pressure
will intensify.
However, co. working hard on improving effectiveness of sales force.
Believe growth should return to about15%YoY by Q3/Q4FY12
Russia
Co. spending ~US$20mn p.a. on the OTC portfolio. Believes growth will follow.
Growth in OTC portfolio will derisk potential risk in the Rx business. Continue
to look for alliance partners with strong brands to further augment Russia
business. Expect to launch biosimilars in Russia by 2014.
Margin Outlook
Margins should clearly improve in the US business with sharp increase in
revenues. However, at the corporate level it may be partly used into spending on
1) Russia OTC, 2) Proprietary products and biosimilars research and 3) currently
in the India business turnaround.
Dr. Reddy's Labs
Founded as a bulk drug firm in the 1980s, Dr Reddy's Labs (DRL) is now an
integrated company with a presence in the domestic and global formulation
segments with FY10 revenue of Rs69.9bn. Pharmaceutical services & active
ingredients made up 30% of sales in FY10 and formulations 70%. DRL derives
14% of sales from formulations sold in India, 14% from Europe and 25% from
the US, and 17% from finished dosages sold in the RoW. The remaining 30%
comes from pharmaceutical services & active ingredients. R&D is focused on
metabolic disorders, cardiovascular indications, anti-infectives and antiinflammation.
Statement of Risk
We believe risks include regulatory risks, FDA approval, timing of approvals,
litigation (including the appeal process), accounting/disclosure, and product
pricing risk from generics competition. Pricing pressure in the US market
because of increased competition may continue. Margin pressure on account of
appreciation of the rupee could also negatively impact earnings. Dr Reddy’s also
has high exposure to the API segment where margins are more volatile than the
formulations segment.
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