Spurt in US nods and launches driving Dr Reddy's Labs

The company that saw delay in product approvals and launches in the US during first half of FY13 is now reaping the benefits of the same

Dr Reddy’s Laboratories has gained around 10% since 22nd of March’13 outperforming the Sensex which is down close to 1.5% in the said period. The traction started coming as the company got approval for launch of new drugs in the US market. While it announced launch the generics of Zenatane (Isotretinion) capsules in March’12 end, the announcement for launch of generic Zoledronic Acid injection in the early April. (The former is used for treatment of Acne and the later is osteoporoses treatment drug). Each of the drugs having more than $300 million market in the US are expected to contribute around $26-$30 million to Dr Reddy’s revenues in FY13 (after discounting the competition as well as the price erosion) as per analysts.

This adds to better revenue visibility for Dr Reddy’s in FY14.

While the company had a strong pipeline of products to be launched in the US, it had seen delays in launch which led the stock touching 52 week lows of Rs 1,528 on 19 June’12. The product approvals gained traction only during second half of FY13 which has led the stock see some better upside.  The company could launch Metoprolol extended release generics (TOprol XL) used for treatment of Hypertension in September’12.

The product has gained good traction in 4-5 months after launch and commands a 11% market share in the US. The Nomura research shows December-February sales at $11 million which indicates that the product is shaping up well. Besides it has been able to launch generics of Propecia (used for hair loss) in February’13. The drug launched on exclusivity had gained around 76% market share in the first month of launch as per Nomura Research. The six months of exclusivity is likely to fetch $20 million for Dr Reddy’s. The company has also launched generics of Zumeta another Osteoporosis treatment drug in the Start of March’13 which can as per estimates of Morgan Stanley is likely to contribute $10-15 million per annum to Dr Reddy’s US revenues.

 
With the momentum of approval and launches picking up FY 14 could see US sales growing at a faster pace. Even Analysts at Citi Observe that DR Reddy’s performance inFY14 to gain from spill over of approvals from FY13. They further add that they Expect Dr Reddy’s to launch several key injectibles over the next 12-36months which should be chunky products. Further they remain positive on the company due to Healthy Market share in current products. They observe that Refocusing portfolio on products with development hurdles to offset pricing pressure in vanilla generics.
 
Analysts at Morgan Stanley see steady earnings momentum (15% FY2013-15 CAGR), stable global generic demand and modest valuation drive their Over Weight rating. The company has 65 ANDAs pending FDA approval. Vidaza, Dacogen and a couple of niche opportunities are some of the pending approvals over next few months, which should accelerate US growth.

 
Hitesh Mahida At Fortune research says that if the company could get approval for Vidaza during FY14, it could drive revenues significantly (estimated annual contribution of $60-70 million). However if the company could not get approval for the same in Fy14 it could lead to some amount of disappointment.

Also Domestic growth remains a matter of concern for Dr Reddy’s. as per Karvy report the company had seen just 8.6% growth during February’13 and 8.2% y-o-y during first 11 months of FY13. They however add that the company’s Dermatology segment is growing at 14.5% on a Y-o-Y basis. Major contributor Gastrointestinal segment too is growing at 12.7% on Feb’13 Y-o-Y basis. There is lower growth in chronic portfolio however New product introduction is the main growth driver for the Company.

 
Nevertheless, in the back of traction coming from the US markets the analysts of late have raised the target price for the company to Rs 2,200 levels though consensus estimates as per Bloomberg suggest a target price of Rs 2,087.