US sales revival in sight for Dr Reddy's

Product pipeline should boost revenue growth in FY19

The Dr Reddy’s stock gained on Tuesday over 5 per cent in trade, on expectation that the company would be soon launching a generic version of opioid treatment drug Suboxone. Coupled with its other launches in FY19 in the US, this should boost its profit.

Analysts at Nomura believe there is a strong probability that the company will get approval in the near term for Suboxone, and expect initially lower competitive intensity. They estimate an annualised earnings per share impact of ~62.5 without additional generic competition. While the indications are positive, any adverse court ruling or launch by other companies is a risk.

JPMorgan also expects a pick-up in launches over the next few quarters (not dependent on facilities under the warning letter), including some complex approvals in this calendar year. Last week, the company announced an audit of its Srikakulam Active Pharmaceutical Ingredient unit was completed without any adverse observations. Clearance of other units by the US regulator will be a major trigger.

In addition to Suboxone, the company will be banking on the launch of generic versions of contraceptive Nuvaring, Aloxi (drug to treat chemotherapy side effects) and cancer drug Gleevec in this financial year. After a revenue decline over two years, these niche lower-competition products could help it post midsingle digit growth in the US. The company has 100 pending Abbreviated New Drug Applications with the US regulator and has lined up about 15 launches there in FY19.

Sales in most other regions as well as pharmaceutical services and the active ingredients businesses are expected to do well. The management expect double-digit growth.

Given the multiple triggers, analysts believe there could be more upside in the share price if things proceed as expected. With target prices of over ~2,700, there is an upside of over 24 per cent from the current levels.