Dr. Reddy’s Laboratories - Solid Quarter, But Challenges in Near Term ::Edelweiss

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Dr. Reddy’s Laboratories’ (DRRD) Q3FY15 results beat our estimates by a big margin at all levels as the adverse currency impact did not play out as per our expectation. Bounce back in both US (up 17% QoQ, 6 launches) and PSAI (up 20%) and a strong RoW (ex-Russia) also led to better-than-expected revenue growth. India was steady with 11% growth, but Russia (down 9%YoY) was hurt by adverse currency movement (30% depreciation). Near term appears challenging because of Russia/Venezuela macros and possible slowdown in ANDA approvals (Form 483 for Srikakulam API). However, we believe that DRRD’s investments in niche pipeline will continue to deliver.

Beat at all levels but Russian/Venezuelan macros to test growth 

EBITDA/PAT beat our estimates by 22%/29% on higher-than-expected US sales (15% beat). We believe US, India and PSAI businesses will continue the good run, but uncertain macro scenario in Russia and Venezuela could pose risks to growth. DRRD has cash flow hedges of Rouble900mn (at 1.5 Rouble/INR versus spot rate of 0.9), which could prevent slide in Russia business growth in ensuing quarters as well, but the local situation remains volatile. Capital controls in Venezuela could pose challenges as it remains a large market with high growth for DRRD.

Nexium ANDA approval in near term remains a possibility

The Srikakulam API facility had received a Form 483 recently and is the reason for Diovan not receiving final approval (despite a tentative approval).  DRRD confirmed that Nexium’s API (Esomeprazole) is from this facility. We believe its seven DMF filings for Esomeprazole will let DRRD employ the CB30 route  to expedite the transfer of API and get approval in next 6 months for their Nexium (USD2.5bn, single generic) ANDA.

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https://www.edelweiss.in/research/Dr-Reddy%E2%80%99s-Laboratories--Solid-Quarter,-But-Challenges-in-Near-Term;-Result-Update-Q3FY15/10005510.html