Dr Reddy's Laboratories: Sustaining US gains critical for a rerating

Gains hinge on key launches; US FDA issues in some plants another hurdle

Dr Reddy’s Laboratories hit its 52-week high level intraday on Monday on the back of strong December quarter performance. Though the stock ended in the red at the end of trading, investor sentiments remained favourable. Since its May 2018 lows, it has gained about 45 per cent. The company’s US revenues are witnessing some stability in FY19, after lacklustre performance earlier because of pricing pressure. The cost controls measures, too, are supporting the company’s performance. 

Revenues from US, which accounts for about 39 per cent of overall sales, declined 8 per cent over the year-ago quarter. It was up 4 per cent on a sequential basis, indicating that generics business might be finally turning the corner. The US sales were aided by higher volume offtake, new launches, and favourable forex offset by some price erosion. 

Its overall performance was supported by 31 per cent year-on-year (YoY) growth in emerging markets, and 10 per cent YoY growth in India.

 

While India and emerging markets are firing on all cylinders, the currency fluctuations in emerging markets kept analysts cautious. It is the US sales that will need to rebound further for earnings growth from here. While the company launched 10 products during the December quarter, including some relatively low-competition products, large product approvals are needed to move the needle on revenue growth. 

 The company expects approval for generic NuvaRing (contraceptive) and generic copaxone (multiple sclerosis drug) in FY20. The favourable litigation outcome, and launch of generic Subaxone (opioid addiction treatment), too, remain crucial. Analysts such as Rakesh Nayudu at Haitong Securities said near-term growth was dependent on a few key launches, and there was room for slip-ups. Also, some of the upsides from the launches are factored in. For growth to pick up, resolution on FDA related issues, too, remained crucial. While the US FDA has asked for more clarifications on the Duvvada sterile injectable facility, the recent audit of the Srikakulam formulations facility (Unit I) has resulted in four observations. 

Not surprising that target prices by the analysts at Haitong Securities, JM financial, Prabhudas Lilladher Research and Nomura do not show any upside from current levels.