A silver lining for Dr Reddy's Labs

Product launch in FY17 with likely revenues of $100 mn a yr should lead to rise in earnings estimates

Dr Reddy's Laboratories saw its stock gain 5.77 per cent to Rs 3,188.35 levels on news of the company getting the US Food and Drug Administration (FDA) approval to launch Aloxi generics. This is the single largest daily gain in six years. The drug in the injectables form is used to prevent chemotherapy-induced nausea and vomiting. This is positive news restoring some confidence in the company’s growth prospects in the US.

Although the firm is not expected to launch the drug immediately, looking at the pending litigation, analysts expect the same to be launched by the end of FY17. On launch, the drug is expected to contribute $100 million per annum, thereby driving the company’s growth. The product adds strength to the company’s injectables portfolio and will be at least a year and a half ahead of competitors, say experts. This can lead to revision of earnings estimates going ahead. Analysts had been cutting their forward earnings estimates looking at the FDA issues involving the company’s Indian plants.

Investor confidence was low after the company got ‘warning letters’ from the FDA for its plant at Srikakulam and two more facilities located near Hyderabad. The weak guidance of the management for the March’16 quarter added to this low confidence as analysts expected remediation costs to go up significantly in the quarter as well for the year ahead. The cross currency headwinds impacting Russian business, too, did not bode well. However, given that the US contributes about 40 per cent to company’s revenues and remains the most important geography both on the top line and margins fronts, the resolution of FDA issues is the key trigger.

The company had, a few days ago, announced buyback of 4.49 million shares under the open market route at a price not more than Rs 3,500 per share subject to approval from share holders. With the move, while downside to the stock prices, remains limited, the approval will add to confidence.

Analysts feel more confident of Dr Reddy’s strategy of de-risking products from Srikakulam. Given the limited downside, the opportunity is good for accumulating the stock from the long term perspective. While the major trigger for the stock will be clearance of its Indian plants from FDA lens, analysts at J P Morgan say the de-risking activities and filing from other facilities should help improve launches in FY17 and see approvals from other facilities.