Sentiments improving again for Dr Reddy's

Concerns over nod to Srikakulam facility, pricing in US subside

Dr Reddy’s continues to grab investors’ attention. First, it was about the pricing mechanism of some of its products coming under the US lens; now it is in talks for an acquisition in the domestic market. Analysts are not worried about the drug maker’s pricing mechanism in the US being probed.

On the Texas attorney general’s issuing summons to the company seeking pricing details of some products, analysts at Ambit say, “Although this move is unprecedented, it would not have any adverse implications for Dr Reddy’s, as drug pricing in the US is not regulated.” This, they feel, is because the US senate is a legislative body and not a fair trade practice watchdog. Besides, the US by definition is a ‘free market’ and pricing is a function of demand and supply.

Thus, there are minor risks to generic companies. In a past precedent in 2014, when the New York Attorney General (NYAG) initiated an investigation against Ranbaxy and Teva regarding a settlement on generic Lipitor (innovator sales of $6 billion in 2011), the companies settled with NYAG for a nominal penalty of $0.15 million each.

Notably, Dr Reddy’s sales in the US continue their strong traction. According to the January 2015 sales data released by IMS, the January sales of Dr Reddy’s saw the second largest increase of four per cent over December 2014 data and an eight per cent increase year-on-year. Analysts at Nomura say the sales increase was driven by anti-viral drug Valcyte generic (launched in December 2014). The product’s market share has in fact increased to 31.1 per cent for the week ending February 13. Vidaza (oncology product) and atorvastatin (lipid control drug) generics also saw sales rise six-nine per cent. The company continues doing well driven by niche, limited competition products.

Concerns over the Russian currency depreciation and Srikakulam facility’s regulatory issues are also easing. Dr Reddy’s reported a 27 per cent growth in Russia during the December 2014 quarter in constant currency terms and mitigated major impact of 30 per cent Rouble depreciation. While investors will be closely watching the facility’s clearance that will enable the company get approval for launch of Nexium generic (gastrointestinal mega product), the recent approval for products of Sun Pharma and IPCA from plants under observation gives hope Dr Reddy’s, too, might get approval.

The company is yet to confirm the acquisition talks with an UCB (India). If the news is true, the acquisition will strengthen Dr Reddy’s presence in India’s respiratory and neurology segments.

Consensus target price stands at Rs 3,738 versus the current market price of Rs 3,455.