Dr Reddy's: Strong US pipeline to boost revenues

Recent launches, strong portfolio in limited-competition categories should aid revenue and margins

Dr Reddy’s Laboratories stock has been one of the highest gainers among Sensex stocks, moving up 16 per cent in the past month. Recent product approvals, niche opportunities and the pipeline in the US, its largest market, have been reasons for investor interest in the stock. Most analysts are bullish, given the US outlook for its injectables, over the counter products and proprietary products portfolio. The three categories, according to Barclays, have the potential to turn into $500-million market each, which would take its US sales to $2-2.3 billion by 2020. US sales, currently 47 per cent of overall revenues, was $1 billion in FY14. What gives confidence is the fact that of the abbreviated new drug application pipeline, over 60 per cent is in the limited-competition space.

Analysts estimate the company will launch at least 10 drugs in the US in FY16. In the proprietary products space, Dr Reddy’s has three new drugs in a late stage of development and expects its first new drug application, filing for a skin product, over the next year.

The company has had a flurry of approvals over the past couple of weeks. The near-term opportunities should come from anti-viral drug Valcyte, expected to be launched in the US next month. Analysts at Prabhudas Lilladher estimate the company to gain $28 million in sales and $18 million in net profit from the drug in the second half of FY15. The other approvals are immunosuppresant Sirolimus (market size $206 million), anti-cancer injection Docetaxel (market size $218 million) and anti-allergic medication Fexofenadine (market size $49.8 million), which should add to its US sales. Multiple sclerosis drug copaxone is to be launched in the first half of 2015, with an estimated market size of $3.5 billion.

The company disappointed the Street in the September quarter due to  muted performance in the US, given fewer launches than a year ago. This, coupled with lower sales revenue due to a falling rouble from its other high margin market, Russia, dented operating profit margins by 245 basis points at 22.7 per cent. The India business, its second largest market by revenue, has seen healthy revenue growth of 14 per cent in the recent quarter and is expected to outperform the domestic market.

One concern for investors has been higher research and development expenses, which at 11.5 per cent of revenues is one of the highest in the domestic pharma space. Margin concerns are expected to recede with progress on the product development front and higher margins from the niche launches going ahead. On the regulatory front, the company's active pharmaceutical ingredient facility at Srikakulam, Andhra Pradesh received inspectional observations from the US FDA recently. While there is no impact of the same currently, any escalation of the observation could impact its supplies and will be an overhang. Most analysts have a buy on the stock which is currently trading at 20.8 times its FY16 estimates.