Low competition positive for Dr Reddy's

A large limited competition portfolio and supply issues at Wockhardt will boost Dr Reddy's revenues from the US market

The Dr Reddy’s Laboratories (DRL) stock gained over 2.1 per cent to Rs 2,456 over the past two trading sessions on expectations that problems at Wockhardt as well as upsides from its limited competition product pipeline in the US market will help boost revenues from the world’s largest market. The geography accounts for about 40 per cent of the company’s revenues.

The first trigger is the import alert on Wockhardt’s Chikalthana facility, which contributed $230 million to Wockhardt’s FY13 revenues with a significant portion of the same coming from the generic equivalent of the hypertension drug, Toprol. In addition to this limited competition drug, Dr Reddy’s also stands to gain from Lamictal (epilepsy drug) as well as Prevacid (heartburn).

Given the import alert and Wockhardt not being able to supply Toprol, Actavis, Mylan, Par Pharma and Dr Reddy’s will be the beneficiaries given the over $250-300 million market for the product.

Dr Reddy’s which has a 13 per cent share could take a piece of Wockhardt’s $120 million sales from the product. Prashant Nair of Citi Research believes that if Wockhardt's share gets evenly divided among the three/four players, even without assuming any pricing power, it could translate in $40 million incremental (and highly profitable) revenues (five-six per cent of US sales) from the product for Dr Reddy's. The research firm has a buy on the stock with a target price of Rs 3,145.  

UBS Research analyst Sonal Gupta believes that DRL with an overlap in most of the limited competition products (Toprol, Lamictal and antisychotic drug Geodon) could benefit as the result of the import alert. Lamictal, according to the research firm, is the most promising given that Par Pharma is the only other generic player selling the drug. The US market for the drug is pegged at $250 million.

Kotak Institutional Securities, which has identified DRL as its top pick in the pharma space, believes the company will be able to sustain its sales momentum in the US market for the rest of the current financial year. Its analyst, Krishna Prasad, says recent launches will be the key driver while the import alert for Wockhardt is likely to aid market share ramp up in select US opportunities. The company recently launched limited competition products, Dacogen and Vidaza, used in treating cancer. While Vidaza sales were modest, Dacogen saw sales of $22 million in the September quarter.

Upsides for DRL come from the fact that a large part of its US sales will come from limited competition, high margin-products, which Prasad estimates at about half of its FY14 and FY15 estimated sales. The same in FY10 was 15 per cent jumping to 43 per cent in FY13. Of the 206 abbreviated new drug applications filed, 62 are yet to get the US FDA approval. Of this, nine are first-to-files which could give DRL rights to market the drugs with limited competition for a six-month period. The research firm has a target price of Rs 2,700.

On the domestic front, DRL reported a strong 13.9 per cent year-on-year growth in October sales, as compared to 5.2 per cent in the overall pharma market. The growth, the highest after Sun Pharma’s 19 per cent, comes after DRL posted 7.6 per cent growth in August as well as September. Sales growth in the trailing 12 months ending October at 15.5 per cent also point to strong growth. The company is the 16th largest with a market share of 2.1 per cent in a Rs 77,000-crore domestic market. Gastrointestinal and cardiac segments (42 per cent of domestic revenues) continue to drive DRL’s growth.