Rise in US product launches to prop up Dr Reddy's fortunes

Higher margins & most new products planned for US launch could see better profit growth in FY14

Dr Reddy’s Laboratories’ stock has gained around 10 per cent since March 22, outperforming the Sensex, which is down close to 1.5 per cent in the same period. The traction started coming as the company got approval for the launch of new drugs in the US market. While it announced the launch of the generics of Zenatane (Isotretinoin; used for treatment of acne) capsules last month-end, it launched generic Zoledronic acid (osteoporosis treatment drug) injection in early April. Notably, each of the drugs having more than $300-million (Rs 1,640-crore) market in the US is expected to contribute around $26-$30 million to Dr Reddy’s revenues in FY14 (after discounting the competition, as well as the price erosion), estimate analysts.

In the last three-four months, the company had launched a couple of products. All these are expected to boost its US business, which accounts for 35 per cent of consolidated revenues and enjoys high margins. The Russian business (over 15 per cent of revenues) is also expected to grow 20 per cent in FY14. Although the domestic business saw growth slowing in FY13, analysts believe the same is factored in the stock. While the consensus target price, according to Bloomberg estimate, stands at Rs 2,087, some analysts have raised it to Rs 2,200, which reflects an upside potential of 15 per cent from the current price of Rs 1,913.

While the company had a strong pipeline of products to be launched in the US, it had seen delays in launches, resulting in the stock touching a 52-week low of Rs 1,528 on June 19, 2012. Product approvals gained traction only during the second half of FY13, which has led to some upside in the stock. For instance, the company launched Metoprolol extended-release generics (TOprol XL), used for the treatment of hypertension, in September 2012. The product has gained good response in four-five months after the launch and now commands an 11 per cent market share in the US. Nomura Research shows the Dec-Feb sales of the product at $11 million.

Besides, the company has been able to launch generics of Propecia (used to treat hair loss) in February 2013. The drug, launched on exclusivity, had gained 76 per cent market share in the first month of launch, according to Nomura Research. The six months of exclusivity is likely to fetch Dr Reddy’s $20 million in revenue. The company has also launched generics of Zumeta, another osteoporosis treatment drug, in early March, which, according to Morgan Stanley, is likely to contribute $10-15 million per annum to Dr Reddy’s US revenues.

With the momentum of product approval and launches picking up, FY14 should see US sales growing at a faster pace. Analysts at Citi say Dr Reddy’s performance in FY14 could gain from spill-over of approvals from FY13 and expect it to launch several key injectibles over the next 12-36 months. They remain positive on the company due to its healthy market share in existing products.

 

Analysts at Morgan Stanley see a steady earnings momentum (compounded annual growth of 15 per cent during FY2013-15), stable global generic demand and modest valuation drive their ‘overweight’ rating. The company has 65 abbreviated new drug applications pending US Food and Drug Administration approval. Vidaza, Dacogen and a couple of niche opportunities are some of the pending approvals over the next few months, which should accelerate US growth.

Hitesh Mahida at Fortune Research says if the company could get approval for Vidaza during FY14, it could drive revenues significantly (estimated annual contribution of $60-70 million to revenues). But any delay in getting the approval could lead to some amount of disappointment.

On the flip side, domestic business growth remains a matter of concern for Dr Reddy’s. According to Karvy Stock Broking, the company had seen a year-on-year (y-o-y) growth of just 8.6 per cent during February and 8.2 per cent in the first 11 months of FY13.

They, however, add the company’s dermatology segment is growing at 14.5 per cent y-o-y. The gastro-intestinal segment, too, grew 12.7 per cent y-o-y in February.

While these gains are being offset by the lower growth in other domestic segments, analysts believe it is imperative for the company to launch new products to improve growth rates. Overall, they expect India revenues to grow between 10-14 per cent.