Hold the cheer

BS Compass

The approval from the US FDA brings Dr Reddy's (DRL) one step closer to launching the drug amlodipine maleate in the US market and reaping the benefits of being the only player to market the drug initially.

Although the fact that the company received the approval is a definite positive, it by no means allows DRL to go full steam on launching the drug. That is because Pfizer has filed a litigation against DRL for patent infringement and until that is cleared by the courts, the launch of the drug remains only a probability.

The drug was earlier planned for launch in August 2003, but the final decision on the hearing has been deferred. The downside to the whole issue is that if the litigation goes against DRL, the company will have to pay damages, which may be huge.

The crux of the litigation is that Amlodipine is the basic drug with variants like amlodipine besylate, amlodipine maleate etc. Pfizer currently has the patent on Amlodipine and as a result, its contention is that any variant of Amlodipine will also be under patent. DRL's contention on the other hand, is that patents are granted on particular variants and not the basic product.

The potential from the drug for DRL is considerable. For instance, if the litigation goes in DRL's favour, then instead of the normal 180-day exclusivity, the company will have a 3-year exclusivity. That is because the USFDA filing is a New Drug Application (NDA) and not an Abbreviated New Drug Application (ANDA).

Simply put, this means that amlodipine maleate is a new branded drug that has not yet been introduced by any other manufacturer and not a generic, which is a copy of a branded drug whose patent has expired.

The possible upside to revenues from the drug could be quite significant - analysts expect sales of the drug in its first full year to contribute around Rs 40-44 per share to DRL's earnings. In comparison, the company's FY03 EPS stood at Rs 46 per share.

HCL Tech

After a number of quarters of flat topline growth, HCL Technologies sprang a pleasant surprise when it announced a 12.5 per cent sequential jump in consolidated revenues.

The core organic software services business grew 11.7 per cent, which according to the company is the result of the near completion of its long-drawn client rationalisation programme.

The rest of the company's businesses grew revenues 32 per cent sequentially, but much of that was due to the consolidation of the software business acquired from HCL Infosystems. Excluding this, the growth stood at 14 per cent.

The business acquired from HCL Infosystems, which had a net margin of just 2.1 per cent last quarter, accounted for 5.5 per cent of consolidated revenues and over a third of incremental revenues. In comparison, HCLT's net margin stands at 18.64 per cent.

Yet, the company managed a 130 basis points improvement in operating margin, thanks to savings on selling, general and administration expenses.

Besides, the company benefited from improved utilisation - in its offshore centres, utilisation jumped to 75 per cent last quarter compared to just 70 per cent in the June quarter. Also, pressure on pricing eased, with average billing rates down just 0.2 per cent.

Operating profit was higher by about 28 per cent and the bottom line continued to get good support from high non-operating income _ treasury income accounted for almost 36 per cent of PBT.

The big question is whether last quarter's performance can be sustained going forward. The company has said that treasury income, which was at high levels in the last two quarters, could get lower. But there is no guidance for revenue growth going forward.

The markets, going by the 15 per cent jump in the stock since the results were announced, seem to be of the view that the performance will be sustained. In case that happens, HCL Tech would be a stock to watch out for. Adjusted for the huge amount of cash on its books, the stock trades at less than 14 times estimated FY04 earnings.

With contributions from Mobis Philipose and Sameer Ranade