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UBS Investment Research
Dr. Reddy's Labs
Q3FY11: waiting for fondaparinux
Q3FY11 Revenues: Rs 19 bn (+10% YoY, +2% QoQ) inline
US revenues grew 12% qoq to US$106mn with further ramp up in Prilosec OTC
and launch of Accolate and Prevacid generic. US sales were impacted by shelf
stock adjustment on account of Lotrel and limited off-take of Prevacid due to high
channel inventory. Co. had steady growth in India at Rs 3bn (+14%YoY). Russia
(US$54mn) growth was weak at 7%YoY due to high base. PSAI business declined
5%YoY to Rs 4.98bn, while Betapharm sales were down 33%YoY to Rs 1.38bn.
EBITDA: Rs 3.8bn (+8% YoY); PAT Rs 2.7bn (vs UBS-e of Rs 2.8bn)
EBITDA margins at 20% were lower than our expectation of 22.7% due to higher
SG&A(+17%YoY) and R&D expenses(+46%YoY). SG&A expense was impacted
by debt refinancing charge related to Betapharm and higher litigation spend in US.
However, lower tax rate at 5% helped drive PAT close to our est.
Fondaparinux and Allegra D-24 remain key near term triggers
We believe fondaparinux approval remains near term trigger for the stock. Partner
facilities for the product have been inspected by US FDA and the co. remains
hopeful of getting an approval in Q4FY11. Allegra D-24 hearing is expected to
start from Jan 31 and mgmt. expects a verdict during Q4FY11. We, however
slightly lower our earnings and PT as we remove Allegra D-12 from our model,
lower est. for Prevacid and PSAI business and model for higher R&D expenses.
Valuation: Maintain Buy, Reduce PT to Rs 2,000 (from Rs 2,100)
We derive our PT from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool. We assume a WACC of 11%.
Key Concall Takeaways
Company launched 16 products in India during the quarter. The domestic
business recorded a growth of 14% of which 8% was attributable to volume
growth and 6% to new product launches. Management maintained its
guidance of 18-20% revenue growth in the domestic market.
Company has launched 7 new products in the current fiscal year in U.S. of
which 3 were launched in the last quarter. Sales of Lanzaprozole, Zafirlukast
and Valcyclovir took of in later part of the quarter and full impact will be
seen in next quarter.
Omeprazole OTC ramped up significantly to a revenue run rate of ~ US$ 10
-12mn/qtr and is now co. third largest product in the US market.
Co. won AOK tenders for only 3 products in Germany
SG&A includes one times expense of $9mn on account of higher spend with
respect to Russian OTC, expenses relating to re-financing the Betapharm
loan and higher spend on litigation during the quarter. Management indicated
that the 3Q expenses should be higher on account of seasonality.
The tax expense was lower benefiting from higher R&D expense and some
adjustments made on the inventory built up on the new products launched.
Company filed 6ANDAs in the quarter, taking the total number of ANDAs
pending for approval to 74.
Company expects to launch 4th bio-similar product in FY11.
Gross Margins for the quarter for global generics business was 65% and for
API was 28%.
Guidance
Mgmt. maintained guidance for an ROCE of 18%-22% for FY11.
Company guided a tax rate in the range 11%-12% for FY11.
Expect the overall R&D spend to be in the range of 7%-8% of sales going
forward.
Valuations
We derive our 12-mth PT from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 11%. At our price target, Dr Reddy’s would trade at 19x FY13
earnings.
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 in 2008. We also believe
changes in the German market could lead to earnings volatility. Margin pressure
on account of appreciation of the rupee could also negatively impact earnings.
Dr Reddys 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
Q3FY11: waiting for fondaparinux
Q3FY11 Revenues: Rs 19 bn (+10% YoY, +2% QoQ) inline
US revenues grew 12% qoq to US$106mn with further ramp up in Prilosec OTC
and launch of Accolate and Prevacid generic. US sales were impacted by shelf
stock adjustment on account of Lotrel and limited off-take of Prevacid due to high
channel inventory. Co. had steady growth in India at Rs 3bn (+14%YoY). Russia
(US$54mn) growth was weak at 7%YoY due to high base. PSAI business declined
5%YoY to Rs 4.98bn, while Betapharm sales were down 33%YoY to Rs 1.38bn.
EBITDA: Rs 3.8bn (+8% YoY); PAT Rs 2.7bn (vs UBS-e of Rs 2.8bn)
EBITDA margins at 20% were lower than our expectation of 22.7% due to higher
SG&A(+17%YoY) and R&D expenses(+46%YoY). SG&A expense was impacted
by debt refinancing charge related to Betapharm and higher litigation spend in US.
However, lower tax rate at 5% helped drive PAT close to our est.
Fondaparinux and Allegra D-24 remain key near term triggers
We believe fondaparinux approval remains near term trigger for the stock. Partner
facilities for the product have been inspected by US FDA and the co. remains
hopeful of getting an approval in Q4FY11. Allegra D-24 hearing is expected to
start from Jan 31 and mgmt. expects a verdict during Q4FY11. We, however
slightly lower our earnings and PT as we remove Allegra D-12 from our model,
lower est. for Prevacid and PSAI business and model for higher R&D expenses.
Valuation: Maintain Buy, Reduce PT to Rs 2,000 (from Rs 2,100)
We derive our PT from a DCF-based methodology and explicitly forecast longterm
valuation drivers using UBS’s VCAM tool. We assume a WACC of 11%.
Key Concall Takeaways
Company launched 16 products in India during the quarter. The domestic
business recorded a growth of 14% of which 8% was attributable to volume
growth and 6% to new product launches. Management maintained its
guidance of 18-20% revenue growth in the domestic market.
Company has launched 7 new products in the current fiscal year in U.S. of
which 3 were launched in the last quarter. Sales of Lanzaprozole, Zafirlukast
and Valcyclovir took of in later part of the quarter and full impact will be
seen in next quarter.
Omeprazole OTC ramped up significantly to a revenue run rate of ~ US$ 10
-12mn/qtr and is now co. third largest product in the US market.
Co. won AOK tenders for only 3 products in Germany
SG&A includes one times expense of $9mn on account of higher spend with
respect to Russian OTC, expenses relating to re-financing the Betapharm
loan and higher spend on litigation during the quarter. Management indicated
that the 3Q expenses should be higher on account of seasonality.
The tax expense was lower benefiting from higher R&D expense and some
adjustments made on the inventory built up on the new products launched.
Company filed 6ANDAs in the quarter, taking the total number of ANDAs
pending for approval to 74.
Company expects to launch 4th bio-similar product in FY11.
Gross Margins for the quarter for global generics business was 65% and for
API was 28%.
Guidance
Mgmt. maintained guidance for an ROCE of 18%-22% for FY11.
Company guided a tax rate in the range 11%-12% for FY11.
Expect the overall R&D spend to be in the range of 7%-8% of sales going
forward.
Valuations
We derive our 12-mth PT from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 11%. At our price target, Dr Reddy’s would trade at 19x FY13
earnings.
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 in 2008. We also believe
changes in the German market could lead to earnings volatility. Margin pressure
on account of appreciation of the rupee could also negatively impact earnings.
Dr Reddys also has high exposure to the API segment where margins are more
volatile than the formulations segment.
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