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Shareholders can retain their investments in the stock of Dr Reddy's Laboratories. Attractive product launches and pipeline in the US, and likely revival in the Russian market are expected to buttress the company's financial performance in the coming year. In the nine-months ended December 2011, DRL reported 29 per cent increase in revenues to Rs 7,015 crore, while profits grew by about 41 per cent to Rs 1,083 crore.
Operating margins helped by exclusivity revenues in the US expanded to 20.1 per cent from 16.1 per cent in the corresponding period last year. Valuations, however, seem to price in the upside. At the current market price of Rs 1,740, the stock trades at about 19 times its likely FY13 per share earnings. The upside from hereon therefore could be limited for some time.
US, a high growth market
The US market is and will remain the largest revenue market for DRL in the next few years. Steady growth in its baseline revenue and upsides from periodically successful Para IV and ‘first-to-file' (FTF) launches in the US buoy up the the company's prospects. In the December quarter, DRL filed three abbreviated new drug applications (ANDAs), taking the cumulative filings to 187. It now has a total of 79 ANDAs pending for approval with the USFDA, of which 40 are Para IVs and 10 are FTFs.
In the December 2011 quarter, DRL's global generics business grew by over 56 per cent to Rs 2,128 crore, driven primarily by the limited competition launch of Olanzapine in the US in October last year.
The drug alone added revenues of about $99 million (about Rs 485 crore) during the quarter. But for Olanzapine, the US revenues registered a growth of 40 per cent. This was supported by strong volume growth in key products (tacrolimus, omeprazole Mg OTC), Shreveport products and steady ramp up in its antibiotics portfolio.
Growth rates in the coming year would be impressive, but it may not be easy for DRL to sustain its performance thereon. While shared FTF launch of generic Geodon and higher contribution from generic Arixtra sales would give a leg up to its revenues, higher competition in its other launches would curtail the growth.
DRL has already garnered 18 per cent market share in generic Arixtra and expects to target the hospital segment once the production stabilises. Generic Arixtra is manufactured using a method developed by Alchemia, and marketed by Dr Reddy's. Only a month ago, Alchemia said that it was selling more than $1.4 million per week worth of the drug in the US market since its launch in July 2011. In end-March, DRL made a regulatory submission covering generic Arixtra in Europe. While the approval is at least a year away, the timely filing provides confidence.
However, in the coming quarters, Olazapine's contributions are likely to come down with the onset of competition. While DRL would benefit from launches of generic Lipitor, generic Plavix and generic Seroquel, the upsides, however, would be limited, given the higher competition in these segments.
For generic Lipitor, higher-than-expected price erosion following the launch by Ranbaxy in the exclusivity period has reduced the available market size for new entrants. Generic Plavix has multiple filers, while generic Seroquel, which has been launched already, has many players vying for market share.
Russia revival on cards
While its Russia revenues too were flat during the quarter (due to delayed winter), it continues to be a key market for DRL. During the quarter, the company's secondary sales growth at 23 per cent, continued to outperform the industry growth of 19 per cent. The management expects the slower growth to reverse fourth quarter onwards — it saw a robust pick-up in customer orders in March 2012 quarter.
India could be a drag
India sales grew 11 per cent during the December ‘11 quarter, driven by volume increase and product launches. While the revival was in line with what the management had said in the previous quarters , heightened competition in the domestic market is likely to make it difficult for DRL to mimic industry growth for a while now.
Even the secondary sales data in recent months point to a slower-than-industry growth rate. While sales force realignment and promotional activities should help here, it would take a while.
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