Dr. Reddy’s Lab­o­ra­to­ries Ltd

(BSE Code: 500124) (CMP: Rs.1982.90) (FV: Rs.5) By Bik­sha­p­athi Thota

Money Times - - Market Outlook Best Bet -

Dr. Reddy’s Lab­o­ra­to­ries Ltd (Dr. Reddy’s) com­menced its gener­ics busi­ness in In­dia in 1986 and is to­day a trusted name in the health­care in­dus­try serv­ing mil­lions of pa­tients with high qual­ity, af­ford­able and in­no­va­tive medicines across the globe. Over the years, the com­pany has sig­nif­i­cantly grown its prod­uct port­fo­lio across mass and spe­cial­ity ther­a­pies. Its port­fo­lio com­prises over 200 prod­ucts cov­er­ing the whole spec­trum of dis­ease ar­eas span­ning gas­troen­terol­ogy, on­col­ogy, pain man­age­ment, car­dio­vas­cu­lar, der­ma­tol­ogy, urol­ogy, nephrol­ogy, rheuma­tol­ogy and di­a­betes. 7 of its brands are listed in the ‘ Top-300’ in the In­dian pharma mar­ket. Its 5,000-mem­ber strong team net­work con­nects with more than 3,00,000 doc­tors reg­u­larly to en­sure the sup­ply of qual­ity medicines. A ma­jor share of its man­age­rial va­can­cies is filled in­ter­nally. Its field force of 3,500+ is de­ployed across the length and breadth of the coun­try.

The com­pany has pro­gres­sively tran­si­tioned from be­ing a maker of mol­e­cules to a provider of medicines. Its ‘Pur­ple Health’ ini­tia­tive aims at tak­ing pa­tient-care be­yond the pill while fo­cus­ing on the fol­low­ing ar­eas - Dis­ease aware­ness and con­ve­nient di­ag­no­sis; Ac­cess to medicines; Bet­ter ther­apy ex­pe­ri­ence; and Ad­her­ence to ther­apy. Dr. Reddy’s re­ported a weak set of num­bers for Q1FY18. It posted 3% higher rev­enue while EBITDA and ad­justed PAT de­clined 19% and 53% YoY re­spec­tively. Op­er­at­ing mar­gins de­clined to 9% - par­tially (~20%) ow­ing to chan­nel de­stock­ing in the do­mes­tic mar­ket and a ma­jor part (80%) due to the tec­tonic shift in the US mar­ket where chan­nel con­sol­i­da­tion and in­ten­si­fy­ing com­pe­ti­tion are cre­at­ing a havoc. The com­pany is find­ing it dif­fi­cult to quickly ad­just its cost struc­ture to this chang­ing re­al­ity. Fur­ther, reg­u­la­tory is­sues had ham­pered new launches whereas ero­sion in the base busi­ness due to in­ten­si­fied com­pe­ti­tion led to a ma­jor de­cline in prof­itabil­ity, which was true for all other generic com­pa­nies as well.

Ail­ing US op­er­a­tions, which con­tin­ued to hurt the base busi­ness of its US op­er­a­tions (45% of the to­tal), grew by just 1% YoY and 2%

QoQ (in CC) due to high com­pe­ti­tion and pric­ing pres­sure in key prod­ucts. gVi­daza and gVal­cyte de­clined se­quen­tially by $11 mn due to price ero­sion. In­dia op­er­a­tions (14% of to­tal) were down

10% YoY im­pacted by chan­nel de­stock­ing on tran­si­tion to the GST regime. Rus­sia op­er­a­tions (13% of to­tal) jumped 48% YoY as the com­pany sup­plied Ri­tux­imab ten­ders. Gross mar­gin plum­meted by

464 bps YoY (up 40 bps QoQ to 51.6%) due to de­lays in key launches and mon­e­ti­za­tion.

The com­pany ex­pects >10 US launches dur­ing FY18. While its pipe­line could spring pos­i­tive sur­prises, ap­proval de­lays could de­rail near-term US rev­enue build up, which hinges on a num­ber of ap­provals with com­plex ap­proval path­ways (gLovenox, gPen­tasa and gDipri­van). In gCopax­one, the com­pany re­sponded to the char­ac­ter­i­sa­tion is­sue in DMF (Drug Master File) in De­cem­ber 2016 and has TAD for Novem­ber 2017. It has re­sponded to the CRL for gNu­var­ing and has a TAD for Q4FY18. We have built in a best case sce­nario (H2FY19) in our es­ti­mates. But the launch de­lays im­ply ~20% down­side to FY19 es­ti­mates.

We feel that the com­pany’s strong pres­ence and man­age­ment skills will help suc­ceed in the cur­rent sit­u­a­tion. Last year, it bought 51 lakh shares at Rs.3090/share and spent Rs.1560 crore in the Buy­back scheme and it’s not ruled out that it will do so again to pro­tect share­hold­ers’ value. Con­sid­er­ing all these fac­tors, we rec­om­mend this stock for a price tar­get of Rs.3000 (25x to FY19E earn­ings) in the next 12-18 months.

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