Launches, base biz expansion tonic for Dr Reddy's double-digit growth

While the company's bottom line grew 10.5% annually over the 2016-17 through 2021-22 (FY22) period, it is expected to register thrice that growth rate over next two years, observes ICICI Securities

A strong launch pipeline for 2022-23 (FY23), market-share gains, and cost-control efforts are expected to drive strong revenue and earnings growth over the next two years for the country’s fourth-largest pharmaceutical (pharma) company by market capitalisation (m-cap), Dr Reddy’s Laboratories.

While the company’s bottom line grew 10.5 per cent annually over the 2016-17 through 2021-22 (FY22) period, it is expected to register thrice that growth rate over the next two years, observes ICICI Securities. 

The January-March quarter (fourth quarter, or Q4) performance in FY22 and growth in the current financial year (FY23) are the near-term triggers. Double-digit price erosion notwithstanding, the company’s US business registered 7 per cent growth on a sequential basis to $265 million, beating analyst estimates.

The US is the largest geography for the company and accounted for 37 per cent of consolidated sales in Q4FY22. The performance of its peers (barring Cipla at 7 per cent quarter-on-quarter, or QoQ, growth to $161 million) in the US market was weaker.

Lupin reported 10.4 per cent decline sequentially to $181 million, on the back of product recalls and price erosion.

Zydus Lifesciences (formerly Cadila Healthcare), too, reported a decline (minus 5 per cent) on a sequential basis to $189 million due to competitive pricing.

Growth in the US region for Dr Reddy’s was led by new launches and scale-up of existing products. The gains were led by the launch of three products in the quarter, including Vasopressin, an antidiuretic hormone, and market-share gains in lipid control drug Vascepa. While the company launched 17 products in the US market last year, it has guided for the roll-out of 20-25 products in FY23. 

Growth outlook for Dr Reddy’s will hinge on product pipeline and upcoming launches. The company has a total of 90 drug filings pending with the US Food and Drug Administration. This comprises 87 abbreviated new drug applications (ANDAs) and three NDAs; of these, 24 have a first-to-file status.

Analysts, led by Siddhant Khandekar, of ICICI Securities believe that in the near term, key launches in complex generics are likely to weather double-digit price erosion in the US market. 

While the company has lined up a slew of launches, most brokerages believe a lot will depend on the traction its generic version of the cancer drug Revlimid is able to acquire. They expect a bulk of the incremental growth from new launches to come from Revlimid, scheduled to hit the market by September this year. 

The Russian/Commonwealth of Independent States market is another geography that could aid growth, going ahead. The company posted a 72.5 per cent year-on-year (YoY) growth in Q4, on the back of higher base business growth, new launches, and divestment of a few non-core brands. Adjusted for sale of brands, the company registered 28 per cent growth. Dr Reddy’s expects growth in Russia to be in double digits in FY23. While it has not experienced any disruption in logistics or payments thus far and is confident of the opportunity, analysts believe that the near-term outlook from this market (Russia/Ukraine constitutes 12 per cent of sales) is uncertain.  

In the domestic formulations (India) segment, the company reported 15 per cent YoY growth (down 5.6 per cent QoQ) and the same was at 10 per cent adjusted for divestment of brands.

Growth on a YoY basis was driven by price hikes, new launches, and non-core brand divestments. The company expects business to grow in double digits. However, given the loss of revenue from Covid-19, the ramp-up of the base business and new launches will be needed to sustain double-digit growth. 

In addition to growth, what the Street will keep an eye out for is the margin trajectory. Gross margins fell 90 basis points on a sequential basis due to pricing pressures, lower export benefits, and increase in inventory provisions. They were, however, offset somewhat by income from divestment. Cost-rationalisation efforts, coupled with growth across markets, would be critical to maintain margins in the future. Most brokerages are positive on the stock and have a ‘buy’ rating. 

Say Tushar Manudhane and Gaurang Sakare of Motilal Oswal Research, “We remain positive on the stock due to its superior execution across key markets, supported by the healthy pace of launches and market-share gains in existing products. The controlled cost is likely to improve operating leverage and drive better profitability over the next two to three years.”

Valuations on 2023-24 earnings estimates at just under 18x make Dr Reddy’s the cheapest stock among the top five pharma companies by m-cap.

Returns for the stock over the past year, too, have been the weakest among the top five, with a price fall of 19 per cent. Investors can consider the stock on dips.