Dr. Reddy's: German pill

THE COMPASS

Contracts from AOK to supply generics in Germany should help boost growth.

Dr Reddy’s Laboratories can sell generic Clarinex in the US for six months from 2012. This week the Hyderabad-based firm settled a lawsuit with Schering Corp and Sepracor Inc following which it will be the exclusive marketer of the anti-allergy drug, albeit for a limited period. In the meanwhile, the Rs 5,006 crore drug major has been selected to supply 8 generic drugs to German insurer AOK, which caters for about 40 per cent of the insured German population and which has floated tenders for 64 products worth an estimated $2.5 billion.

The contracts should help Dr Reddy’s gain volumes and market share in that country, especially for the four drugs for which it will be the exclusive supplier for two years. Of course, these are preliminary results and it’s too early to factor in the upsides . Moreover, analysts are not sure why the company has not disclosed what the potential sales value of these products could be.

In fact, they are not sure how profitable these products will turn out to be—prices, they believe, could be heavily discounted. Firms like Stada have indicated that they are prepared to cut prices aggressively in Germany in a bid to gain market share. Already, Dr.Reddy’s has seen some pressure on the operating margins for its German subsidiary Betapharm because of higher rebates in that market. It is in the process of streamlining its sales force and is reported to have brought down the team strength to 100 from 250 when it took over the firm.

Dr.Reddy is focussing on the US and Russian markets too---Russia accounts for nearly 10 per cent of total revenues and a higher share of profits. The company is doing fairly well in the US---where it plans to increase the number of products that it sells from 40 to 50. In 2009-10 it will be selling Imitrex (anti-migraine) exclusively for some period, which should fetch it some one-time gains.

Dr. Reddy’s believes that it can grow revenues by 25 per cent in 2008-09 over the Rs 5,006 crore posted in 2007-08; this would be partly aided by the depreciating rupee. In the six months to September 2008, the sales were up 28 per cent at Rs 3,118 crore, while the net profit stood at Rs 268 crore. Net profits in 2007-08 were Rs 468 crore.