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Injectables segment emerging as new revenue driver for Dr Reddy's

While increase in US FDA approvals and new product launches augurs well, the niche injectables segment is expected to see its revenues double in FY14

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Dr Reddy’s Laboratories continues to gain traction on the bourses and has given strong returns of 22.5 per cent since the start of this financial year, thanks to increased traction in approvals from the US Food and Drug Administration (FDA) for new product launches. The company had seen slow approvals and launches during the first half of FY13, but there is marked increase in momentum since January this year, thereby increasing its FY14 earnings prospects. Among the key drivers, analysts expect the niche segment of injectables to drive growth for the company in the medium term. This, along with traction in the other segments, is expected to drive Dr Reddy’s earnings almost 20 per cent annually in FY14 and FY15, despite a high base of last year.

Analysts at CLSA say recent launches like Toprol XL, Zenatane and Reclast / Zometa are likely to help Dr Reddy’s report mid-teens growth in the US generics business on a large base. The US business accounts for about 45 per cent of Dr Reddy’s consolidated sales. Analysts at Kotak Securities, too, have increased their FY14/15 estimated earnings per share (EPS) by four-six per cent primarily due to higher gross margin in the PSAI (pharmaceutical services and active ingredients) segment and updated currency assumptions. They raised their target price to Rs 2,400 for the stock trading at Rs 2,164 levels. Analysts at CLSA have a target price of Rs 2,350. According to Bloomberg data, of the 12 analysts polled in June, eight have ‘buy’ ratings, while four have ‘hold’ ratings with target price ranging from Rs 2,200 to Rs 2,400.

While the new launches bode well for Dr Reddy’s, the market is awaiting the launch of Vidaza generics, a drug used for treating anaemia and leukaemia. Hitesh Mahada at research firm Fortune Equity Brokers says Vidaza is a significant $60-70 million opportunity (on an annual basis) for the company. The launch will also add to the injectables portfolio that Dr Reddy’s is developing for driving growth. Dr Reddy’s is focusing strongly on injectables given the large opportunity the segment offers, as well as the success it has tasted with anti-coagulant drug, Fondaparinux, launched in injectables form during 2011. Notably, other key players such as Sun Pharma, Aurobindo and Strides Arcolab have also gained good mileage from the segment.

The injectables contribution for Dr Reddy’s stood at $60-65 million in FY13 and comprised just 9-10 per cent of its US sales. However, it is likely to grow fast after the recent generic launch (in injectable form) of osteoporosis drug, Zumeta and Reclast in March-April this year. While Zumeta is a $10-15 million product, Reclast is likely to contribute around $30-40 million to Dr Reddy’s sales in FY14. The contribution from these two products itself should help Dr Reddy’s injectables segment revenues to almost double from current levels.

The company had also acquired OptoPlus, the Netherlands-based injectables major, in February 2013, which is likely to help Dr Reddy’s strengthen its injectables business. Analysts at Kotak Securities observe the acquisition of OctoPlus is likely to play a key role in accelerating the development timeline for long acting injectables and liposomal formulations. Long acting injectables are a key opportunity over the next five years and the acquisition should help the company to be among the early generic entrants.

While the company has seven known filings in the injectables segment, in the near-term the market is awaiting the launch of generic drugs for leukaemia treatment (Vidaza and Dacogen).

Among other recently launched new products in different dosage forms like generics of Toprol XL (an anti-hypertensive drug launched in September 2012), the company has met with good success. Morgan Stanley’s data shows the product is continuing its traction with Dr Reddy’s dominating with a 24 per cent market share. Besides, the generics of Propecia (a $140-million brand) launched with 180 days exclusivity on January 3 this year has gained a market share of 86.6 per cent as on June 7, according to the research house. The company’s acne treatment drug (generic of Isotretinoin), which was launched in March-end, is also gaining ground. For the week ending June 7, its market share increased to 2.7 per cent (up 100 basis points week-on-week).

The company on Wednesday announced the launch of a generic drug to treat epilepsy. In a four-five players market, the product is estimated to be a $5-10 million per annum opportunity for Dr Reddy’s. The respite from competition, however, comes from the fact that Wockhardt, which had also received approvals for the launch, now may not be able to launch the product due to its Indian facilities facing US FDA issues.

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