| German pain, American gain | |
| Ram Prasad Sahu / Mumbai May 25, 2009, 0:36 IST | |
While headaches on account of Betapharm could ease, Dr Reddy’s is banking on its American operations to boost profitability.
New product launches in the US market and volume growth in key markets of Russia, Germany and India are likely to help pharmaceutical major, Dr Reddy’ Laboratories sustain an annual sales growth 15-20 per cent over the next 3-4 years.
The impediment for the company, so far, has been its German operations due to its high cost structure and tough pricing environment for generic drugs in Germany.
Going ahead, considering that the company has taken steps to change its business model, the same should provide stability to Dr Reddy’s revenues. Likewise, measures to enhance growth in the Indian market should bear fruits from the September 2009 quarter.
Pricing concerns
Ever since its acquisition three years ago for Rs 3,000 crore, Dr Reddy’s has had to grapple with issues such as high costs, falling drug prices and severe competition at its German subsidiary, Betapharm (accounts for a large chunk of Dr Reddy’s European sales). Dr Reddy’s had paid a premium for intangibles due to the branded nature of the market.
But now, the tough pricing scenario and shift to a high volume, low margin business strategy has forced the Indian company to write-off the goodwill and intangible assets to the tune of Rs 1,400 crore. Despite the pricing pressures, the company believes that future write-downs, if any, will be much smaller than in FY09.
In spite of the AOK tender for 8 products for which supply will begin in June 2009, the company expects business growth for Betapharm to be flat in the current year. Revenues in FY09 for the German business grew 20 per cent y-o-y to Rs 985 crore aided by a 16.5 per cent y-o-y increase in volume growth from existing products.
Going ahead, the company plans to enhance profitability by shifting production of more Betapharm products to Indian facilities. It has cut its sales-force in Germany and is simultaneously looking at enhancing its supply chain to ensure new product availability. For growth, it will look to the US and Russian markets.
| What lies ahead |
| One major product in the US market on an ongoing basis; current year could see launch of Omeprazole |
| Cutting costs at Betapharm by reducing manpower and shifting production of more products to India |
| Improving its therapeutic coverage in India and targeting hospitals and rural segment |
| Exiting from smaller distributor driven markets will help sustain profit growth |
| Volume and revenue growth to be driven by US, Germany and Russia in the near term |
The sumatriptan boost
On a consolidated basis, a higher y-o-y adjusted sales and operating profit growth of 24 per cent and 50 per cent for Dr Reddy’s came from sales of its anti-migraine medication sumatriptan in the US.
In four months (December 2008 to March 2009), this authorised generic version of GlaxoSmithkline’s Imitrex with a generic market share of 50 per cent, grossed sales of Rs 791 crore. The sales from just one product in 2008-09 is almost at par with the entire US sales in 2007-08 of Rs 802 crore.
Excluding sumatriptan, revenues from the US business grew 24 per cent on the back of 16 new product launches.
In addition to the sales of sumatriptan whose exclusivity is set to last till the first week of August, for FY10, the company will be looking at the likely launches of its antacid omeprazole and anti-coagulant fondaparinux to keep its exclusivity-related windfalls going.
Going ahead, of the 69 abbreviated new drug applications (ANDA) which are pending for approval with the US FDA, 18 are first-to-files where the company may get exclusivity. Expect the gains from these to accrue only in the long-run.
| EXCLUSIVITY BENEFITS |
| in Rs crore |
FY09 |
% change |
FY10E |
| Net sales |
6944.0 |
39.0 |
7638.0 |
| EBIDTA |
1450.0 |
50.0 |
1604.0 |
| Net profit / (loss) |
-516.0 |
-
|
935.0 |
| Adjusted profit |
850.0 |
89.0 |
935.0 |
| P/E (x) |
11.8 |
-
|
10.2 |
| E=Estimates, * year on year |
Supply chain issues
The Indian sales growth of 5 per cent in 2008-09 to Rs 848 crore is less than double-digit Indian pharma industry growth. This underperformance was due to fewer new launches, problems of raw material availability and change in supply chain model.
The destocking exercise that was undertaken is likely to continue for this quarter and the company expects improved sales from the second quarter of 2009-10. While Dr Reddy’s has 6 products in the top 300 brands, it is eyeing other therapeutic products beyond its profitable niches of dermatology, neurology, dental and oncology.
Going ahead, the company wants to expand its reach in the rural areas, tap the hospital segments and northern India where its reach traditionally has been weak.
Investment argument
Going ahead, the supply chain issue in India, the tough credit market for APIs as well as key geographies in Russia are some key manageable risks. But, the biggest risk for the company is the stability of its German operations.
Further, growth will also be hampered if its US launches are delayed or if the company fails to get a favourable ruling on its drug applications. While the company’s guidance of 10 per cent revenue increase in 2009-10 looks achievable, improvement in profit margins will hinge on new product launches in the US.
At Rs 629, the stock trades at 11.44 times its estimated FY10 consolidated EPS of Rs 55. While the stock has run up 17 per cent over the last one month, analysts estimate that it still has some distance to run as it trades at a discount to peers such as Ranbaxy (Rs 219, 20.6 times its CY10 earnings estimate). Expect returns of 15-20 per cent over the next one year.
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