Highlights of our meeting with Dr Reddy’s CFO :Nomura research,

We met with with Dr Reddy’s CFO Mr Umang Vora. The CFO sounded
positive on the company’s FY13 outlook and expects Dr Reddy’s to
achieve at least US$2.5bn in revenues. With some product approvals
and market share gains, the turnover could reach US$2.7bn in FY13.
Management expects the growth momentum to pick up from Q2
onwards, and Q1 may remain relatively weak due to lack of new
launches. The US remains the most important growth driver with the
potential for positive surprise from undisclosed products. The company
expects to launch 15-20 products in the US every year until FY17, with
1-2 low-competition complex generics. These new launches are likely to
contribute US$100-200mn in revenue in the first year of launch. The
focus remains on hard-to-characterise and complex chemistry products
(Arixtra approval and Copaxone DMF filing are indications). Going
forward, growth in Russia is expected to be at 15-20% and is likely to be
characterised by interesting differentiated product launches such as
Rituximab and partnership products. In India, growth is back on track
and is expected to grow in line with the broader market. We believe
through internal development programs and partnerships (like GSK and
Merck Serono) the company is putting in place a sustainable growth
platform and at the same time managing risks. The valuation at 16x
FY13 is attractive, in our view. We maintain our Buy rating with a 12-
month target price of INR1,918. Below, we present highlights of our
meeting with management.

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 Sustainable growth in US until FY17: The company expects 15-20
launch every year in the US until FY17. One or two products each year
are likely to be limited competition opportunities. The new launches
are expected to add US$100-200mn in revenues in the year of launch,
with the potential to grow further in subsequent years on full-year
impact and market share gains. The opportunity set will vary from year
to year, and FY14 is possibly the leanest over the next five years.
However, the company doesn’t expect de-growth in the US business
in FY14. Management believes the growth rate is likely to revive
starting FY15.
 US pipeline surprises remain a possibility: There could be 1-2
interesting product opportunities in FY13 over and above what has
been already disclosed. The company expects to launch Propecia with
180 days exclusivity in FY13. Dr Reddy’s expects to be the sole
generic player during exclusivity.
 Focus on complex generics: Relying on its strength on
characterisation and complex chemistry, the company continues to
focus on limited competition opportunities. Difficult to characterise
products like Arixtra are being pursued. We note that company has
recently filed a DMF on Glatiramer Acetate (copaxone) which is
another difficult to characterise product.


 Russia growth likely to be in mid to high teens with interesting
differentiated product launches: Russia growth has been strong, at
a 25% CAGR over the past five years. Dr Reddy’s is ranked third in
terms of volume and 13th in terms of value in the marketplace. The
growth, to an extent, has been driven by price increases, which the
company may not be able to sustain. Even in terms of volume, Dr
Reddy’s has outgrown the pharmaceutical market. Dr Reddy’s
recorded volume growth of 12% against market growth of just 1% in
FY12. On a high base, growth is likely to slow going forward to the mid
to high teens. Dr Reddy’s intends to leverage the scale and the front
end through partnerships (such as with Cipla and Merck) and
differentiated products including biosimilars. The company is already
pursuing the biosimilars opportunity and has partnered with a local
partner to pursue the Provision of Supplemental Medicines, or DLO
business. Rituximab, which is a US$170mn product in Russia, loses
patent protection next year and is an opportunity that could unfold over
the next two years. Besides these differentiated products, over-thecounter
(OTC) medicines will continue to remain an important growth
driver. OTC products, which accounted for 29% of Russia revenues in
FY12, are likely to increase further to 40-45% over time. The new
launches should help lower dependence on a few brands in the
market. Management also highlighted that the receivables cycle is
high at ~120 days in Russia, but it has been kept under control.
 India business growth reviving: Growth is reviving and is likely to be
in line with the broader market. Initiatives such as sales force
realignment are now complete.
 PSAI segment growth linked to patent expiries: The API growth in
FY13 is likely to remain strong, as the segment growth is highly linked
to patent expiries. The segment is likely to record relatively strong
performance starting 2QFY13. Beyond FY13, the segment growth is
likely to be at ~10%.
 Pursuing growth with retaining RoCE at 22-25%: The company
retains its ROCE guidance of 25% for FY13. The company is happy
pursuing growth by maintaining RoCE between 22% and 25%. We
believe there is no appetite for large front-end acquisition at this stage.
The company is, however, likely to pursue acquisition of technologies
that can assist develop complex generics.
 Consistent hedging policy: The company maintains a consistent
hedging policy of hedging 60% of the net dollar exposure for the next
18 months. There is approximately US$400-500mn of hedges
corresponding to FY13 cash flows. Hedges are at a INR/USD rate of
50-51. Hedges for the first six months of FY14 are also now in place at
a INR/USD rate of 54-55.
 Capex likely to remain at US$100-150mn in the years ahead.