Dr Reddy’s stock has underperformed the Sensex for some time, after lower-than-expected growth in the June quarter and, lately, the hangover of the drug pricing policy. However, the latter is behind it and analysts are now estimating only a minor impact on Dr Reddy’s revenues after considering the recommendations by a group of ministers (GoM).
On the other hand, the company has launched a series of products in September from its strong pipeline for FY13. With previous launches continuing to provide the boost, the second half of FY13 is likely to see stronger growth. Thus, most analysts are bullish on the stock with a consensus target price of Rs 1,874, according to Bloomberg data, indicating 14 per cent upside from the current levels of Rs 1,649.
Drug pricing policy’s, minor impact
After the GoM's’ decision on the pricing formula and looking at the drugs under purview, analysts do not see much impact on Dr Reddy’s revenues as compared to its peers. Analysts at Nomura, who see an impact as high as 11-12 per cent on Glaxo’s FY14 Ebitda (earnings before interest, taxes, depreciation and amortisation) estimate just 1.2 per cent impact on Dr Reddy’s. Anubhav Aggarwal at Credit Suisse observes the impact on Dr Reddy’s India sales is less than one per cent from the current draft policy and, therefore, the risk of pricing policy is behind us.
September has seen a series of product launches in the US, which includes all strengths of anti-hypertensive Toprol XL generics (metoprolol extended release; total market size $1.1 billion) launched on September 11. Taking into consideration the price erosion compared to the existing prices and rebates as well as 10-15 per cent market share, analysts at Morgan Stanley estimate $60-70 million in revenues (with high margins) for Dr Reddy’s on a 12-month basis.
On September 20, Dr Reddy’s launched antibiotic amoxycillin in various dosage forms (tablets, capsules and oral suspension).
In the current market scenario with Sandoz, Teva and Hikma already in the US market, accounting for over 70-90 per cent share depending on the dosage forms, analysts at Morgan Stanley estimate the launch to be a $20-million-plus revenues per annum opportunity for Dr Reddy’s. The company has already garnered a market share of 30 per cent for augmentin (amoxicillin and clavulanate) during the first five to six months of launch, earlier this year.
The latest US launch (September 27) by Dr Reddy's is an anti-asthmatic product montelukast sodium oral granules, a bio-equivalent generic version of singulair (montelukast sodium) oral granules. According to IMS Health, the singulair granules had sales of nearly $61 million in the US market for 12 months ending July. This product is likely to see limited competition as Teva, the other player having approvals, has not launched the generics.
Other growth drivers
In addition to the new launches, already launched products like psychiatric treatment drug geodon generics could continue driving revenues even after the end of exclusivity. The product launched by Dr Reddy’s and Lupin on exclusivity now only sees one to two new players (Wockhardt, Apotex) entering the market.
Analysts at Morgan Stanley estimate $80 million in revenues (assuming 30 per cent rebate, 15 per cent price drop and 12 per cent market share) with 60 per cent net margins for Dr Reddy’s on a 12-month basis. Despite several Drug Master Filings in the US, there doesn’t seem to be any tentative approval for geodon. Hence, if new competition doesn’t step in, it could turn out to be $30-40 million recurring sales business (at high margins) for the company.
Agarwal of Credit Suisse observes after a weak June quarter and lost sales on Lipitor in the September quarter, the second half of FY13 core EPS will be 17 per cent higher than the first-half, driven by market share gains in metoprolol, Lipitor, amoxil and lansoprazole OTC.
Analysts at Morgan Stanley, too, share a similar view and see the second half of FY13 to be better than the first as the US pipeline is getting thicker (amoxil, toprol XL, Lipitor, ibandronate), which should help deliver strong profits. The company expects to launch another one to two lucrative products in the US in the ensuing months.
Aggarwal says Dr Reddy’s stock is currently trading at a discount of 18 per cent to Lupin and 26 per cent to Sun Pharma. This discount, he feels, is higher-than-justified given that the next three quarters should be better than the previous ones, largely driven by already launched products in the US.
For the longer run, analysts at Kotak Securities add that Dr Reddy’s has built a balanced portfolio with equal focus on generics and branded markets, which should deliver 16 per cent to core revenue compounded annual growth rate (CAGR) during FY13-15. They believe branded markets (India, Russia/CIS) will help maintain growth momentum and expect recent turnaround in the India business to sustain with a revenue CAGR of 15.2 per cent during FY13-15.