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UBS Investment Research
Dr. Reddy's Labs
Q 1FY12: Inline cutting est. on higher R&D
Event: Inline qtr but helped by low tax rate
While Q1FY12 Sales was close to UBS-e of Rs 20bn, EBITDA was lower by 6%
(UBS-e: Rs 4.1bn) partly impacted by one-off VRS expense. However, PAT at Rs
2.63bn (UBS-e: Rs 2.7bn) was inline due to low tax rate of 4% for the qtr (vs an
adj. tax rate of of 16%). Sales growth was poor in India at 6%YoY while it was
inline in Russia (+22%YoY) and US (flat QoQ).
Impact: Reducing estimates on higher R&D and tax rate
Mgmt. raised tax rate guidance to 21% for FY12 from 15%-16% previously on
account of Zyprexa exclusivity in H2FY12. Mgmt. now expects R&D to trend in
the 7%-7.5% range going forward on account of higher spend on more complex
generics, biosimilars and proprietary products. We are reducing our FY12/13 EPS
by 9%/4% on account of the same.
Action: Maintain Buy, H2 earnings momentum should be strong
We expect base business earnings to improve in H2FY12 with ramp up of newly
acquired Bristol penicillin facility in US and ramp up of Fondaparinux and Allegra
D-24 OTC. Mgmt. expects to launch 10 more products in the US in FY12. We
believe Indian business underperformance remains key worry in the near term with
no clear solutions.
Valuation: Maintain Buy, PT Rs 1,850 (from Rs 1,900)
We derive out 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
Q1 FY12 India growth was impacted by higher attrition especially in the
rural region and less than expected impact of field force expansion and re
deployment which was carried on earlier. Also there was some pricing
pressure in the domestic market. Mgmt. expects growth to revert to normal
from H2FY12. Co. had approx. 3,800 sales reps in India.
Fondaparinux will be launched in a phased manner because of the complex
manufacturing of the product. The company will first concentrate in the
wholesale and the retail chains which constitute 40% of the sales. Mgmt.
believes there may be an authorized generic launch as well.
The new GSK facility should peak sales from Q3FY12 and could average
$5mn of sales per month on annualized basis.
Received approval for Allegra D-24 OTC in the US and will launch the
product soon.
The weak performance in CIS markets (excl. Russia) and ROW market was
impacted due to deep devaluation of currency in Venezuela and Belarus.
Russia continued to grow well on the back of strong growth in the OTC
portfolio. OTC business has increased from 25% of the Russian revenues to
30% over the last 1 year. Co. continues to aggressively invest in promotion
for the OTC business. OTC business accounts for 40% of the pharma market
in Russia.
Co. expects to launch 1 bio-similar product every 12 months in India.
Currently, biosimilars is 7% of India business with 4 products on the market.
Valuations
We derive our 12month PT from a DCF-based methodology and explicitly
forecast long term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 11%.
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
Q 1FY12: Inline cutting est. on higher R&D
Event: Inline qtr but helped by low tax rate
While Q1FY12 Sales was close to UBS-e of Rs 20bn, EBITDA was lower by 6%
(UBS-e: Rs 4.1bn) partly impacted by one-off VRS expense. However, PAT at Rs
2.63bn (UBS-e: Rs 2.7bn) was inline due to low tax rate of 4% for the qtr (vs an
adj. tax rate of of 16%). Sales growth was poor in India at 6%YoY while it was
inline in Russia (+22%YoY) and US (flat QoQ).
Impact: Reducing estimates on higher R&D and tax rate
Mgmt. raised tax rate guidance to 21% for FY12 from 15%-16% previously on
account of Zyprexa exclusivity in H2FY12. Mgmt. now expects R&D to trend in
the 7%-7.5% range going forward on account of higher spend on more complex
generics, biosimilars and proprietary products. We are reducing our FY12/13 EPS
by 9%/4% on account of the same.
Action: Maintain Buy, H2 earnings momentum should be strong
We expect base business earnings to improve in H2FY12 with ramp up of newly
acquired Bristol penicillin facility in US and ramp up of Fondaparinux and Allegra
D-24 OTC. Mgmt. expects to launch 10 more products in the US in FY12. We
believe Indian business underperformance remains key worry in the near term with
no clear solutions.
Valuation: Maintain Buy, PT Rs 1,850 (from Rs 1,900)
We derive out 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
Q1 FY12 India growth was impacted by higher attrition especially in the
rural region and less than expected impact of field force expansion and re
deployment which was carried on earlier. Also there was some pricing
pressure in the domestic market. Mgmt. expects growth to revert to normal
from H2FY12. Co. had approx. 3,800 sales reps in India.
Fondaparinux will be launched in a phased manner because of the complex
manufacturing of the product. The company will first concentrate in the
wholesale and the retail chains which constitute 40% of the sales. Mgmt.
believes there may be an authorized generic launch as well.
The new GSK facility should peak sales from Q3FY12 and could average
$5mn of sales per month on annualized basis.
Received approval for Allegra D-24 OTC in the US and will launch the
product soon.
The weak performance in CIS markets (excl. Russia) and ROW market was
impacted due to deep devaluation of currency in Venezuela and Belarus.
Russia continued to grow well on the back of strong growth in the OTC
portfolio. OTC business has increased from 25% of the Russian revenues to
30% over the last 1 year. Co. continues to aggressively invest in promotion
for the OTC business. OTC business accounts for 40% of the pharma market
in Russia.
Co. expects to launch 1 bio-similar product every 12 months in India.
Currently, biosimilars is 7% of India business with 4 products on the market.
Valuations
We derive our 12month PT from a DCF-based methodology and explicitly
forecast long term valuation drivers using UBS’s VCAM tool. We assume a
WACC of 11%.
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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