Dr Reddy’s Laboratories
CMP: INR1835
05 April 2013
Update |Sector: Healthcare
TP: INR 2332
BUY
Dr. Reddy’s Labs: Launches generic Reclast; Limited competition
expected ahead; upgrade EPS by 5%/3% for FY14E/15E
(DRRD IN, Mkt Cap USD5.7b, CMP INR1835, TP INR2332, 27% Upside, Buy)
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Dr. Reddy’s
has
launched its generic version of Novartis’ Reclast (Zoledronic
Acid 5mg/100ml injection). The product generates USD355m of sales in US
annually for Novartis.
Dr. Reddy’s is one of the two players who have received ANDA approval, while
we believe that there are at least 10 other players who have filed para IV ANDAs
for the drug. We expect limited competition for DRRD in FY14E which could
increase in FY15E.
Consequently, we estimate this product to add 5%/3% to our FY14E/15E EPS
estimates and have added this upside to our base business estimate, since we
expect such low‐competition, low‐market sized opportunities to recur going
forward.
The stock currently trades at 17.9x FY14E and 15.8x FY15E EPS. Maintain Buy
with target price of INR2332 (20x FY15 EPS + INR4 DCF value for Para‐IV
upsides).
-
-
-
Background
‐
The management indicated that it’s Para IV ANDA was filed against the 4939130
patent which expired on 2nd March 2013.
‐
On 22nd February 2013, Novartis filed a patent infringement lawsuit against 12
generic players, including Dr. Reddy’s, seeking to prevent launch of a generic
version until later patents expire (between March 2024 – August 2028).
‐
However, Dr. Reddy’s and Emcure Pharma are the only two companies to have
secured an ANDA approval for the drug. We believe that this could be because
their ANDAs were filed before the listing of the later patents on Reclast (listed
between April 2011 ‐ December 2012), while other ANDAs by competitors were
filed afterwards.
‐
This could act as an entry barrier for other generic filers; at least 10 others
including Sun Pharma and Wockhardt.
‐
Apart from Emcure Pharma & Dr. Reddy’s approval, the management indicated
that there is another authorized generic player in the market.
Impact
‐
We estimate revenues of ~USD43m/~USD31m for FY14E/FY15E with PAT of
~USD15m/~USD11m from this opportunity. Our estimates are based on the
assumption that competition will be limited to 3 players for the next 12 months,
with competition increasing thereafter.
‐
Key risk to our estimates include (1) sooner than expected increase in
competition and (2) any negative impact due to an unfavorable outcome from
the ongoing litigation (management has assigned very low probability to this).
‐
We have added the upside from this launch to our base business estimate since
we expect such low‐competition, low‐market sized opportunities to recur going
forward.
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Dr Reddy’s Laboratories
Valuation & view: Buy with target price of INR2332
‐
Traction in the US generics and sustained growth momentum in international
branded formulations segment will be the key growth drivers for DRRD going
forward.
‐
Significant gap between guidance and consensus implies some product
opportunities in US are not visible to investors as of now. Management
indicated that it is on‐track to launch these products in the near‐future, subject
to regulatory approvals. Consequently, DRRD has launched generic Reclast,
generic Zometa and Isotretinoin over the last 30 days.
‐
We believe that the strong growth visibility over the coming quarters is poised
to give reasonable returns for investors. While investors are rightly concerned
about the likely muted growth for FY14E (given the adverse impact of patent
cliff for DRRD’s US and PSAI businesses), we believe that these concerns are
discounted in current valuations.
‐
Based on our revised estimates, the stock trades at 17.9x FY14E and 15.8x FY15E
core earnings. Maintain BUY with TP of INR2332, 27% upside.
05 April 2013
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Dr Reddy’s Laboratories
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Dr Reddy’s Laboratories
No
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05 April 2013
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