Dr Reddy’s stellar performance for the quarter ending December (Q3) was led by the launch of an anti-psychotic drug, Olanzapine generics (Zyprexa brand) in the US on an exclusivity basis. The pharmaceutical services and active ingredients (PSAI) segment also provided a boost, as did Russian & CIS sales. While it is heartening that domestic sales growth touched a double-digit figure (11 per cent), it was still below industry growth.
US growth prospects remain strong for Dr Reddy’s, given the robust product pipeline. Russia/CIS sales are also expected to post good growth, with the rest of the world (RoW) growth estimated at 15 per cent. However, most of these positives remain factored in at current levels. Based on the one-year consensus target price, there is an upside of 7.5 per cent from current levels of Rs 1,644.
Nevertheless, there are other triggers which aren’t fully reflecting in the stock. Among key catalysts over the next six months will be approvals and success in new product launches (Geodon, Seroquel and Lipitor) and upward revision in management’s revenue expectation of $2.7 billion for 2012-13. Higher than industry growth in the domestic business could also add up.
| LOWER FY13 GROWTH | |||
| In Rs crore | Q3FY12 | FY2012E | FY2013E |
| Net sales | 2,769.19 | 9,227.62 | 10,492.87 |
| Y-o-Y change (%) | 45.90 | 23.54 | 13.71 |
| Ebitda | 868.82 | 2,091.80 | 2,356.09 |
| Ebitda (%) | 31.37 | 22.67 | 22.45 |
| Net profits | 512.96 | 1,376.78 | 1,584.17 |
| Y-o-Y change (%) | 87.80 | 24.71 | 15.06 |
| EPS (Rs) | 30.26 | 79.07 | 92.03 |
| PE (x) |
– | ||
US sales boost
The generics version of Olanzapine, launched in the US during October 2011, contributed $99 million during Q3, and pushed up US sales to $235 mn (up 125 per cent year-on-year) in the quarter. Zyprexa’s robust performance also helped Dr Reddy’s absorb $21 mn worth of forex loss. Notably, even after adjusting for Zyprexa, the overall base business grew by 22 per cent, led by strong US sales.
While Zyprexa has been able to garner a 60 per cent market share, with 40-45 per cent price erosion, the contributions will drop in the March 2012 quarter due to stocking in the December 2011 one. Analysts at Emkay Global estimate Zyprexa’s contribution at $60-65 mn in the current quarter. However, this decline will be taken care by other products. For instance, Fondaparinux (an anti-coagulant drug), launched during July 2011 in an injectible form, has gained market share of around 18 per cent. The management says bottlenecks in production have been resolved and it expects to start supplies to the hospital segment, too.
Additionally, the pipeline for products to be launched in the US remains strong. These include generics of Geodon and Seroquel (psychiatric drugs), launch of Lipitor generics after Ranbaxy’s exclusivity expires and a ramp-up in anti-biotic and over-the-counter (OTC) drug sales. OTC product sales touched $100 mn in the first nine months of 2011-12 and are expected to touch $200 mn in 2012-13. Analysts at Morgan Stanley say they expect the quality of earnings to improve in FY13, given the more “durable nature” of sales by new products. Dr Reddy’s has 79 Abbreviated New Drug Applications (ANDAs) pending with the US drug regulator, the FDA, for approval, of which 40 are Para IV and 10 are First-To-Files.
Others
The pharmaceutical services and active ingredients segment saw a 11.7 per cent year-on-year growth during the quarter to Rs 556.3 crore; gross margins were 35 per cent. Sales in the Russian & CIS region, up 15.2 per cent year-on-year to Rs 331.7 crore, were impacted due to the late onset of winter. However, sales have picked up in January, claims the management.
Biosimilars, marketed in India, South Africa and some countries in West Asia, are expected to see sales rise from an estimated $30 mn in 2011-12 to $100 mn by 2013-14. Thus, they hold the key for future growth and investments in research for these, as well as complex generics and proprietary products, are likely to keep R&D investments at 7.5 to eight per cent of sales. For expansion in the Japanese markets, a definitive agreement with Fujifilms is likely be signed in 2012-13, say analysts at Morgan Stanley.
Outlook
While the US business and most markets contributed well, the domestic formulations business grew 11 per cent year-on-year to Rs 330 crore, better than the 9.5 per cent growth in the September quarter and the five per cent in the June quarter. While this is still lower than the industry growth rate, management expects growth to pick up in a few quarters, with field-force alignments and product launches (23 this year and six in the December quarter). Analysts say that upside in the stock is possible if the domestic business grows ahead of industry and, more important, if there is an improvement in base (continuing) business.
