Street upbeat on Dr Reddy’s
Good sales momentum, Covid treatment portfolio driving analysts to upgrade earnings estimates
Dr Reddy’s Laboratories (DRL) continues to be in the limelight on product-specific news, further improving its business outlook. The settlement of a patent dispute for a large drug to be launched in the US had already lifted sentiment, pushing the stock to fresh highs in September.
DRL received attention recently for having reapplied to conduct Phase 3 human clinical trials for the Covid-19 vaccine candidate Sputnik V. Any success will add to the company’s already strong growth prospects. Therefore, analysts see more gains ahead, even though the stock has already outperformed the Nifty Pharma and Nifty indices in the past few months.
The company has ample near-term earnings catalysts both in the India and US businesses. DRL has been posting strong growth in emerging markets and Europe, too, while opportunities in the active pharmaceutical ingredients (APIS) market have helped it see strong growth in the pharmaceuticals services and active ingredients segment. Added to that is mileage from an already launched Covid-19 treatment portfolio in India.
In the US, the company has changed its business approach to niche opportunities and is focusing on controlling costs. After divesting some loss-making proprietary products, DRL has launched 20-plus products every year on average and Nomura estimates each product to initially contribute $5-7 million annually. The company has been strengthening its injectables portfolio, where competition is limited. This is important looking at the pricing pressure, which has remained high in the US market in past few years.
Among Us-focused generic companies, DRL remains IIFL’S top pick considering that a string of new launches in the North American market will help sustain growth momentum until FY23.
The company’s low-competition new launches such as generics of antibacterial Ciprodex, hyperphenylalaninemia treatment Kuvan, and pain relief over-thecounter Voltaren gel are expected to drive near-term sales, while market share gains in opiod treatment Subaxone generics bode well, say analysts.
Also, the anticipated launch for generics of contraceptive Nuvaring, cardiovascular treatment drug Vascepa (both in FY22) and myeloma treatment Revlimid (FY23) could improve future prospects. The company settled US patent litigation for potential launch of Revlimid (market size $7.5 billion) with the innovator company in September.
With US growth prospects remaining firm, DRL has increased its focus on India and other markets. Domestic growth could be propelled by the acquisition of Wockhardt’s product portfolio. Nomura expects a strong pickup in primary sales in Q2FY21 for the portfolio as supply constraints are addressed.
The launch of Covid-19 treatment dugs is another trigger. DRL launched inlicensed drug Favipiravir in June in India. It also had in-licensed Favipiravir for emerging markets (ex-japan, Russia and China), and with Fujifilm receiving positive data from Phase 3 study, the growth trajectory might improve.
DRL has an exclusive licence with Gilead to manufacture and market Remdesivir in India. Dr Reddy’s has meaningful presence in domestic markets for HCQS, another Covid treatment. Any positive development on Sputnik V, for which DRL tied up for clinical development in India, will be an additional trigger. The downside risk is if some of them don’t deliver the anticipated results.
Meanwhile, for the September quarter, analysts at Motilal Oswal Securities expect DRL’S India revenue to grow by 20 per cent year-on-year (YOY) on better traction in the chronics portfolio and addition of Wockhardt portfolio. The US sales are seen growing 21 per cent YOY to $245 million, driven by new launches. DRL’S profit before tax is estimated to grow 18 per cent YOY for the quarter. Given the multiple triggers, analysts at Nomura have raised their target price for DRL to ~6,036. It closed at ~5,055 on Thursday.