US portfolio boosts Dr Reddy's prospects

New product launches have led to strong US growth that is likely to sustain, providing impetus to company's earnings

Dr Reddy's performance for the quarter ending December 2013 was largely driven by strong global generic sales, especially in North America and CIS countries, helping it beat market estimates comprehensively. And there is more to come, say analysts.

North America, which contributes about 48 per cent to overall revenues and 55 per cent to global generic sales of Dr Reddy's, saw generic sales grow at a phenomenal 76 per cent during the quarter, led by the US. The key driver here is the increase in approvals for new generic launches in US during start of 2013, which have now started to bear fruits. These are mostly limited competition niche products, which are not only driving revenues but profitability too. Ebitda margins were up sharply to 24.5 per cent in the quarter versus 15.4 per cent last year and expectations of 22 per cent. Led by new launches, the US business, which grew by just 4.6 per cent in FY13 in dollar terms, is estimated to grow by over 25 per cent in FY14 as well as FY15. Analysts at JP Morgan see US sales touching $1 billion mark for Dr Reddy's in FY15.

 

After results, the stock touched its all-time high of Rs 2,700 but saw some profit-booking and closed at Rs 2,651. While the current consensus target price from analysts polled by Bloomberg since January stands at Rs 2,888, analysts are upgrading their target price and earnings for the company. Investors, thus, can accumulate the stock.

Ranjit Kapadia at Centrum Broking who had a target price of Rs 3,200 is revisiting his numbers after results, while Arvind Bothra at Religare Capital Markets said that he retains 'Buy' and his earnings estimates are to inch up versus earlier.

While Dr Reddy's net sales at Rs 3,533.76 crore (up 23 per cent year-on-year and 5.25 per cent sequentially) for the quarter were slightly ahead of estimates of Rs 3,498 crore, it was the profitability which surprised on the positive side. Ebitda at Rs 864.40 crore was well head of expectations of Rs 782 crore and so was net profit at Rs 618.5 crore versus estimates of Rs 541.1 crore. Even after adjusting for reversal in impairment losses of Rs 49.7 crore during the quarter, the performance was better.

In the niche segment and difficult to produce drug categories like injectibles, Dr Reddy's has seen a pickup in new launches from the start of 2013. Launch of injectibles like Zometa and Reclast (orthopaedic products) in the first quarter followed by bigger products as Dacogen and Vidaza (treatment of blood disorders) have started showing results in the second half of FY14. Dacogen and Vidaza, according to analysts, are estimated to be $40-50 million per annum products for Dr Reddy's. Generics of migraine treatment, Divalproex ER (launched in 2013) and the ones launched earlier like anti-hypertensive product, Toprol XL, immune suppressant Tacrolimus as well as Fondaparinux injectibles, are also seeing steady growth in market share. Thus, on the back of US growth, global generic sales for Dr Reddy's grew 41.1 per cent year-on-year. Analysts like Sriram Rathi at Anand Rathi believe growth momentum will continue to be driven by these and new products in the near- to mid-term.

Bothra at Religare also expects strong earnings traction to sustain for another two-three quarters. Dr Reddy's is expected to launch the anti-bacterial Moxifloxacin generic, which has a market size of $350 million annually, on exclusivity basis by March this year, while another three products (non-exclusivity) are lined up for launch in May.

Analysts at JP Morgan expect Dr Reddy's US business to report a strong 33 per cent growth in second half of FY14 compared to 19 per cent in first half and just five per cent in FY13, driven by the transition to high-margin complex and limited competition products launched over the last few months and also market share gains in some older products. They also believe the pending product pipeline has a few more injectable opportunities like Aloxi, Angiomax, Ixempra, etc.

Geographies like Russia and CIS countries also grew at a healthy pace. Sales in Russia recorded a growth of 17 per cent year-on-year to Rs 430 crore, while CIS markets at Rs 100 crore marked a growth of 45 per cent. Rest of the world revenues at Rs 210 crore grew by 35 per cent. Russia revenues growth that looks comparatively lower was due to late onset of winter and is likely to improve in the current quarter.

The pharmaceutical services and active ingredients segment (PSAI) and domestic growth, however, disappointed. PSAI revenues fell 29 per cent year-on-year to Rs 510 crore due to lower launches by customers while meagre five per cent growth in domestic revenues to Rs 510 crore was a result of lower prices due to the new pharma policy implementation.