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Investment view – Well set for the next leg of growth
The US is the anchor driver, with support from Russia, India and other businesses
We initiate coverage on Dr Reddy’s Laboratories with a BUY rating and a 12-month target price of INR1,677.
The US remains the anchor growth driver in Dr Reddy’s quest to achieve its sales vision of USD2.7b, and
this would be supported by Russia, India and other businesses. We estimate Dr Reddy’s will add USD880m
worth of sales over FY11-14, of which the US is estimated to contribute 40%. A large part of this addition
would come from limited competition products which are to be introduced over the next 12-15 months. We
have modelled slower-than-historical growth for Russia and India, with Europe and API likely to continue
their existing growth trajectory
Key limited competition products to drive US growth over the next 18 months
Over the last decade, Dr Reddy’s has developed a strong pipeline for the US. The company has filed 170
ANDAs of which 94 are approved and 76 pending approval with the US FDA. Of the 76 pending, Dr Reddy’s
has 38 Para IV filings of which 10 are first-to-files (FTF). The company is also present in the OTC space in
the US (USD80m, 19% of US sales).
Dr Reddy’s has a good history of monetising its Para IV opportunities in the US. Key opportunities monetised
so far are Fluoxetine (Prozac, 2001), Fexofenadine (Allegra, at risk launch, 2006), Ondansetron (Zofran, FTF,
2007), Simvastatin (Zocor, authorised generic, 2007), Sumatriptan (Imitrex, authorised generic, 2009),
Omeprazole Mg OTC (Prilosec OTC, 2010), Rivastigmine (Exelon, 2011). The company has also launched
interesting limited competition products such as Fondaparinux (Arixtra, 2011) and Tacrolimus (Prograf,
2010). We estimate Dr Reddy to have booked sales of more than USD800m from these limited competition
opportunities so far in the US (~40% of cumulative US sales starting 2005).
We see good traction in the US business over the next 18 months driven by the launch of many limited
competition products. Key products are generic Olanzepine 20mg, Atorvastatin, Ziprasidone and
Esomeprazole. The company is also likely to scale up its market share in generic Fondaparinux and at the
same time see increasing traction in the OTC market. We value Dr Reddy’s Para IV filing at INR80/share.
In the last fiscal year, Dr Reddy’s acquired GlaxoSmithKline’s oral penicillin facility and product portfolio, to
enter the US antibiotic market. Dr Reddy’s has rights to the Augmentin and Amoxin brands in the US. The
facility had sales of USD4m while it incurred a cost of USD5m in 1QFY12. As products from the facility start
rolling out, we estimate that the site can generate sales of USD40m in FY12, USD50m in FY13 and USD60m
in FY14.
Dr Reddy’s has 75 ANDAs awaiting approval with the US FDA which indicates that growth in the US is not
restricted to limited competition products. OTC is one area which could see significant scale-ups, given the
large gap between Perrigo (PRGO US, Not rated), the leader in the OTC business, and other companies. Dr
Reddy’s has identified biosimilars and complex generics as growth avenues beyond FY13, and it is looking
for a partner for biosimilars in the regulated markets.
We estimate sales of USD630m in FY12 scaling up to USD765m in FY14. We estimate base business growth
of 23% to USD615m over the same period. We note that the US is the main driver for Dr Reddy’s, and timely
approvals/launches are critical.
Russian government intervention: Dr Reddy’s is prepared for a structural change
Russia accounts for 16% of Dr Reddy’s sales and has witnessed a revenue CAGR of 23.6%, to INR8.9b over
FY09-11. Russia contributes ~20% to Dr Reddy’s operating profits and hence is one of the most important
geographies for Dr Reddy’s.
The company has a presence in both the prescription and OTC space. OTC accounts for 25% of the overall
Russian business. The company does not have a large basket of products in Russia and therefore
revenue/product is higher than any other branded market. The top six brands in FY11 accounted for 81%
of Russian sales.
We have been reading about increasing government interference in the Russian pharmaceuticals industry.
Russia is a USD13b market with the majority of the market being out of pocket. The local manufacturing
companies lack expertise and account for only 20% of the medicines sold in the country, while 80% of the
requirement is imported. The Russian government has set out a ‘pharma vision for 2020’ where it wants to
reduce the dependence on imported medicines to 50% from the current 80%. Over the past 18 months the
government has taken significant steps towards this vision.
EXHIBIT : Recent initiatives by the Russian government
Year Initiative
2009 Introduced Good Manufacturing Practices throughout local manufacturers
2010 Encouragement to local manufacturers for tenders
2010 Only local products can have price increases more than once a year
2010 Published a list of 57 strategically important drugs to be manufactured locally by 2015, majority of these are currently imported
Sources: Industry reports; BNP Paribas
In FY11, Dr Reddy’s revenue growth of 25% was driven by a volume growth of 33% but offset by a price
decline of 9%. While these initiatives can be seen as a negative for international companies, we believe Dr
Reddy’s has time on its hands and is much better prepared for a structural change – unlike what happened
with Betapharm (Germany) when the industry transitioned into a tender-driven market from branded
generics over a period of 18-24 months. We would not be surprised if Dr Reddy’s announces the acquisition
of a local pharma company in the short to medium term to keep abreast with the demands of the Russian
government.
Given the current market situation, we build in slower-than-historical growth for Dr Reddy’s in Russia. We
estimate revenue CAGR of 17%, to USD315m, over FY11-14. We highlight that we are conservative on our
Russia estimates and hence there could be upside potential here.
Key risks
Delay in key product launches in the US
As mentioned earlier, the US is likely to account for 40% of the incremental growth over FY11-14. Any delay
in key product launches or regulatory issues may have a significant impact on our earnings.
Greater-than-expected price erosion in limited competition product launches in the US
Limited competition product launches are one of the most important growth drivers for Dr Reddy’s over
FY11-14. These are estimated to be high-margin products and a large contributor to margins. Greater-thanestimated
price erosion in such products may have a significant impact on our estimates.
Greater-than-expected price decline in Russia to impact margins more than sales
We note that a greater-than-expected price decline in Russia may have a greater impact on Dr Reddy’s
margins given that Russia is a high-margin business.
Valuation
The US is the anchor driver with support from Russia, India and other businesses
We initiate coverage on Dr Reddy’s with a BUY rating and a 12-month target price of INR1,677. The US
remains the anchor growth driver in Dr Reddy’s quest to achieve its sales vision of USD2.7b, supported by
Russia, India and other businesses. We estimate Dr Reddy’s to add USD880m worth of sales over FY11-14 of
which the US is estimated to contribute 40%. A large part of this addition would come from limited
competition products which are to come over the next few years. We have modelled slower-than-historical
growth for Russia and India, with Europe and API likely to continue their existing growth trajectories.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Investment view – Well set for the next leg of growth
The US is the anchor driver, with support from Russia, India and other businesses
We initiate coverage on Dr Reddy’s Laboratories with a BUY rating and a 12-month target price of INR1,677.
The US remains the anchor growth driver in Dr Reddy’s quest to achieve its sales vision of USD2.7b, and
this would be supported by Russia, India and other businesses. We estimate Dr Reddy’s will add USD880m
worth of sales over FY11-14, of which the US is estimated to contribute 40%. A large part of this addition
would come from limited competition products which are to be introduced over the next 12-15 months. We
have modelled slower-than-historical growth for Russia and India, with Europe and API likely to continue
their existing growth trajectory
Key limited competition products to drive US growth over the next 18 months
Over the last decade, Dr Reddy’s has developed a strong pipeline for the US. The company has filed 170
ANDAs of which 94 are approved and 76 pending approval with the US FDA. Of the 76 pending, Dr Reddy’s
has 38 Para IV filings of which 10 are first-to-files (FTF). The company is also present in the OTC space in
the US (USD80m, 19% of US sales).
Dr Reddy’s has a good history of monetising its Para IV opportunities in the US. Key opportunities monetised
so far are Fluoxetine (Prozac, 2001), Fexofenadine (Allegra, at risk launch, 2006), Ondansetron (Zofran, FTF,
2007), Simvastatin (Zocor, authorised generic, 2007), Sumatriptan (Imitrex, authorised generic, 2009),
Omeprazole Mg OTC (Prilosec OTC, 2010), Rivastigmine (Exelon, 2011). The company has also launched
interesting limited competition products such as Fondaparinux (Arixtra, 2011) and Tacrolimus (Prograf,
2010). We estimate Dr Reddy to have booked sales of more than USD800m from these limited competition
opportunities so far in the US (~40% of cumulative US sales starting 2005).
We see good traction in the US business over the next 18 months driven by the launch of many limited
competition products. Key products are generic Olanzepine 20mg, Atorvastatin, Ziprasidone and
Esomeprazole. The company is also likely to scale up its market share in generic Fondaparinux and at the
same time see increasing traction in the OTC market. We value Dr Reddy’s Para IV filing at INR80/share.
In the last fiscal year, Dr Reddy’s acquired GlaxoSmithKline’s oral penicillin facility and product portfolio, to
enter the US antibiotic market. Dr Reddy’s has rights to the Augmentin and Amoxin brands in the US. The
facility had sales of USD4m while it incurred a cost of USD5m in 1QFY12. As products from the facility start
rolling out, we estimate that the site can generate sales of USD40m in FY12, USD50m in FY13 and USD60m
in FY14.
Dr Reddy’s has 75 ANDAs awaiting approval with the US FDA which indicates that growth in the US is not
restricted to limited competition products. OTC is one area which could see significant scale-ups, given the
large gap between Perrigo (PRGO US, Not rated), the leader in the OTC business, and other companies. Dr
Reddy’s has identified biosimilars and complex generics as growth avenues beyond FY13, and it is looking
for a partner for biosimilars in the regulated markets.
We estimate sales of USD630m in FY12 scaling up to USD765m in FY14. We estimate base business growth
of 23% to USD615m over the same period. We note that the US is the main driver for Dr Reddy’s, and timely
approvals/launches are critical.
Russian government intervention: Dr Reddy’s is prepared for a structural change
Russia accounts for 16% of Dr Reddy’s sales and has witnessed a revenue CAGR of 23.6%, to INR8.9b over
FY09-11. Russia contributes ~20% to Dr Reddy’s operating profits and hence is one of the most important
geographies for Dr Reddy’s.
The company has a presence in both the prescription and OTC space. OTC accounts for 25% of the overall
Russian business. The company does not have a large basket of products in Russia and therefore
revenue/product is higher than any other branded market. The top six brands in FY11 accounted for 81%
of Russian sales.
We have been reading about increasing government interference in the Russian pharmaceuticals industry.
Russia is a USD13b market with the majority of the market being out of pocket. The local manufacturing
companies lack expertise and account for only 20% of the medicines sold in the country, while 80% of the
requirement is imported. The Russian government has set out a ‘pharma vision for 2020’ where it wants to
reduce the dependence on imported medicines to 50% from the current 80%. Over the past 18 months the
government has taken significant steps towards this vision.
EXHIBIT : Recent initiatives by the Russian government
Year Initiative
2009 Introduced Good Manufacturing Practices throughout local manufacturers
2010 Encouragement to local manufacturers for tenders
2010 Only local products can have price increases more than once a year
2010 Published a list of 57 strategically important drugs to be manufactured locally by 2015, majority of these are currently imported
Sources: Industry reports; BNP Paribas
In FY11, Dr Reddy’s revenue growth of 25% was driven by a volume growth of 33% but offset by a price
decline of 9%. While these initiatives can be seen as a negative for international companies, we believe Dr
Reddy’s has time on its hands and is much better prepared for a structural change – unlike what happened
with Betapharm (Germany) when the industry transitioned into a tender-driven market from branded
generics over a period of 18-24 months. We would not be surprised if Dr Reddy’s announces the acquisition
of a local pharma company in the short to medium term to keep abreast with the demands of the Russian
government.
Given the current market situation, we build in slower-than-historical growth for Dr Reddy’s in Russia. We
estimate revenue CAGR of 17%, to USD315m, over FY11-14. We highlight that we are conservative on our
Russia estimates and hence there could be upside potential here.
Key risks
Delay in key product launches in the US
As mentioned earlier, the US is likely to account for 40% of the incremental growth over FY11-14. Any delay
in key product launches or regulatory issues may have a significant impact on our earnings.
Greater-than-expected price erosion in limited competition product launches in the US
Limited competition product launches are one of the most important growth drivers for Dr Reddy’s over
FY11-14. These are estimated to be high-margin products and a large contributor to margins. Greater-thanestimated
price erosion in such products may have a significant impact on our estimates.
Greater-than-expected price decline in Russia to impact margins more than sales
We note that a greater-than-expected price decline in Russia may have a greater impact on Dr Reddy’s
margins given that Russia is a high-margin business.
Valuation
The US is the anchor driver with support from Russia, India and other businesses
We initiate coverage on Dr Reddy’s with a BUY rating and a 12-month target price of INR1,677. The US
remains the anchor growth driver in Dr Reddy’s quest to achieve its sales vision of USD2.7b, supported by
Russia, India and other businesses. We estimate Dr Reddy’s to add USD880m worth of sales over FY11-14 of
which the US is estimated to contribute 40%. A large part of this addition would come from limited
competition products which are to come over the next few years. We have modelled slower-than-historical
growth for Russia and India, with Europe and API likely to continue their existing growth trajectories.
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