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Dr. Reddy's Laboratories
Weakness provides entry opportunity
Event
ƒ DRRD has corrected ~15% from its peak and has underperformed its peers
YTD. A delay in the Fonda approval and slower growth in India in 4QFY11
have been the key investor concerns.
ƒ We believe investors have been on the sidelines anticipating a weak 1QFY12
(absence of Allegra D-24 coupled with a delay in Fonda). Pressure might exist
around 1Q results if Fonda does not arrive before 1QFY12 reporting, however
it's difficult to time a stock to perfection. DRRD is our preferred large cap pick
and we believe current weakness provides an attractive entry opportunity
given strong growth ahead.
Impact
ƒ Things to look better from 2H FY12: The launch pipeline in the US looks
robust for the remainder of the year, with roughly 10 products planned.
Multiple drivers for growth ahead (apart from Fonda) include Olanzapine (Oct-
11 launch), Allegra OTC (D24 launch in 2QFY12), Augmentin (acquired from
GSK, ramp-up in 2HFY12) and Geodon (1QFY13).
ƒ Fonda launch: DRRD continues to highlight that the site inspection went well
and all queries have been responded to. Despite being accepted under
priority review (GIVE initiative) given the complexity it’s not approved yet.
Average review time for ANDA by the FDA currently stands b/w 27 to 30
months. Fonda was submitted in Mar-09 and assuming the average review
time-line at the FDA currently, 2QFY12 approval is likely in our opinion.
ƒ OTC portfolio gaining traction in the US: Omeprazole, Fexofenadine and
Ranitidine are the key products currently, with few key pipeline products (like
(Prevacid OTC) to be launched by FY13. OTC contributes about 10% to the
US top line, with expectations of it contributing ~ 20% by FY13.
ƒ Proxy for emerging market play: Strong growth in branded formulation
emerging market sales (India, Russia and CIS and RoW) remains a key
driver. We expect these regions to contribute US$0.8bn, ~35% of our FY13
top-line estimate of US$2.5b. We believe the GSK deal, the supply for which
is slowly ramping up, positions DRRD well to unlock other emerging market
(RoW) growth (FY13 and after). Biologics and an innovative drug delivery
pipeline are all option values that should unfold over the medium term.
Earnings and target price revision
ƒ Slight adjustment to our FY12 earnings to Rs90 from Rs91 as we push the Fonda
launch behind by a quarter. Our TP gets revised to Rs1,820 (from Rs1,840).
Price catalyst
ƒ 12-month price target: Rs1,820.00 based on a Sum of Parts methodology.
ƒ Catalyst: 1) Fonda launch 2QFY12 (2) Olanzapine 20 mg launch 3QFY12
Action and recommendation
ƒ Adjusting for exclusivity, DRRD is trading at ~ 17x FY12E and 14x FY13E PER.
Maintain OP with TP of Rs1,820 & reiterate DRRD as our top large cap pick
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dr. Reddy's Laboratories
Weakness provides entry opportunity
Event
ƒ DRRD has corrected ~15% from its peak and has underperformed its peers
YTD. A delay in the Fonda approval and slower growth in India in 4QFY11
have been the key investor concerns.
ƒ We believe investors have been on the sidelines anticipating a weak 1QFY12
(absence of Allegra D-24 coupled with a delay in Fonda). Pressure might exist
around 1Q results if Fonda does not arrive before 1QFY12 reporting, however
it's difficult to time a stock to perfection. DRRD is our preferred large cap pick
and we believe current weakness provides an attractive entry opportunity
given strong growth ahead.
Impact
ƒ Things to look better from 2H FY12: The launch pipeline in the US looks
robust for the remainder of the year, with roughly 10 products planned.
Multiple drivers for growth ahead (apart from Fonda) include Olanzapine (Oct-
11 launch), Allegra OTC (D24 launch in 2QFY12), Augmentin (acquired from
GSK, ramp-up in 2HFY12) and Geodon (1QFY13).
ƒ Fonda launch: DRRD continues to highlight that the site inspection went well
and all queries have been responded to. Despite being accepted under
priority review (GIVE initiative) given the complexity it’s not approved yet.
Average review time for ANDA by the FDA currently stands b/w 27 to 30
months. Fonda was submitted in Mar-09 and assuming the average review
time-line at the FDA currently, 2QFY12 approval is likely in our opinion.
ƒ OTC portfolio gaining traction in the US: Omeprazole, Fexofenadine and
Ranitidine are the key products currently, with few key pipeline products (like
(Prevacid OTC) to be launched by FY13. OTC contributes about 10% to the
US top line, with expectations of it contributing ~ 20% by FY13.
ƒ Proxy for emerging market play: Strong growth in branded formulation
emerging market sales (India, Russia and CIS and RoW) remains a key
driver. We expect these regions to contribute US$0.8bn, ~35% of our FY13
top-line estimate of US$2.5b. We believe the GSK deal, the supply for which
is slowly ramping up, positions DRRD well to unlock other emerging market
(RoW) growth (FY13 and after). Biologics and an innovative drug delivery
pipeline are all option values that should unfold over the medium term.
Earnings and target price revision
ƒ Slight adjustment to our FY12 earnings to Rs90 from Rs91 as we push the Fonda
launch behind by a quarter. Our TP gets revised to Rs1,820 (from Rs1,840).
Price catalyst
ƒ 12-month price target: Rs1,820.00 based on a Sum of Parts methodology.
ƒ Catalyst: 1) Fonda launch 2QFY12 (2) Olanzapine 20 mg launch 3QFY12
Action and recommendation
ƒ Adjusting for exclusivity, DRRD is trading at ~ 17x FY12E and 14x FY13E PER.
Maintain OP with TP of Rs1,820 & reiterate DRRD as our top large cap pick
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