Dr Reddy's strong drug pipeline comes to the fore

With regulatory woes receding, earnings growth over the next two years expected to be robust

Dr Reddy’s was the biggest gainer among Sensex stocks on brokerage upgrades, and US Food and Drug Administration (FDA) approval for one of its plants saw the stock move up 7.5 per cent. These two developments will help it launch new products and capitalise on niche opportunities.

This is the second unit to receive the establishment inspection report after the one in Miryalaguda (Telangana) got an FDA green signal in February. The receding plant-related worries means the Street will now turn to the company’s product portfolio and launch timeline to gauge revenue potential in the US.

Deepak Malik of Edelweiss Securities believes a large and increasing complex generics pipeline in the US and tripling of biosimilar revenue to $150 million over FY18-20 will lead to a 53 per cent growth in net profit over the period. Analysts believe a strong pipeline (including niche opportunities) should help the company overcome or neutralise price erosion in key products.

Among the major high-ticket drugs which would drive US revenue growth is contraceptive Nuvaring, with a generic market size of $580 million (Teva is the other generic player). There is also multiple sclerosis drug Copaxone, with market size in excess of $3 billion, and Suboxone (market size of $1 billion), used in pain management and to curb addiction. Copaxone’s Active Pharmaceutical Ingredient was filed from the Srikakulam facility and the plant approval, thus, clears the regulatory hurdle. Nuvaring and Suboxone are part of eight Abbreviated New Drug Applications the company acquired from Teva in August last year for $350 million. The four products are expected to be launched between the fourth quarter of FY18 and till FY20. If things go according to the plan, the company can hope to grow its US revenue by at least 30 per cent in FY18-20.

The only plant-related regulatory hurdle would be the Duvvada (Andhra Pradesh) facility, flagged down with six observations by the German drug regulator earlier this month and 13 observations by the FDA in March. This could take time to sort out. While analysts don’t expect these observations to translate into a new warning letter, faster approval is key, as it makes high-margin oncology injectables.

What adds to the stock’s appeal is its attractive valuation, at 13 times its FY20 estimates. This is cheaper compared to larger peers. Investors, however, must have a longer-term horizon, as key approvals and launches are expected in FY19 and FY20.