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Dr.Reddy's vs. Teva: Which generics co. is better? - Views on News from Equitymaster
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  • Jan 7, 2011

    Dr.Reddy's vs. Teva: Which generics co. is better?

    The global generics market in recent times has become one that is characterized by intense competition and price erosion. In such a scenario, players are required to be cost competitive, focus on niche products having higher margins and have scale. In this article we compare two companies that have been actively competing in the generics market for quite some time now. One is the largest generics company in the world. The other has managed to break into top 10 bracket of generics companies in the world. One is already a very strong player in the US and is looking to strengthen its presence in other geographies. The other is in fact strong in emerging markets and is focusing on having a very strong product basket in the US. Let us then see how both these companies fare on certain parameters.

    On the R&D front: Teva (an Israeli company) is miles ahead of its Indian counterpart on the R&D front. For starters, as far as new drug discovery research is concerned, Teva already has a product in the market called 'Copaxone.' It is a drug for treating multiple sclerosis and accounts for almost 18% of Teva's overall sales and a considerable chunk of its profits. Dr.Reddy's, on the other hand, has yet to have a patented product in the market. Its lead molecule for diabetes 'Balaglitazone' is in Phase III and appears to stand a chance of reaching the market in the future but this is again highly uncertain.

    As far as the generics space is concerned, Teva's ANDA pipeline is huge. As at the end of October 2010, Teva had a pipeline of 203 ANDAs out of which 83 were first-to-file (FTFs) amounting to US$ 55 bn in brand sales. Dr.Reddy's had 74 ANDAs pending approval of which 12 are FTFs.

    Acquisitions: Although Teva has reported strong growth in sales organically in the past, acquisitions have played a role in strengthening its business too. For starters, it acquired Barr and its subsidiary Pliva in 2008 and Ivax in 2006 which firmly entrenched its position in the US as well as Europe as the biggest generics player. Given how competitive the generics industry is, scale has become paramount in holding on to market share and having bargaining power in the US market. In early 2010, the company acquired Ratiopharm, the second largest generics company in Germany, to widen its European ambitions.

    Dr.Reddy's biggest acquisition so far has been Betapharm in Germany. Betapharm at the time of acquisition was the fourth largest generics company in Germany. The subsequent changes in the German generics market has had an adverse impact on Betapharm and the company has not been able to add much value so far to Dr.Reddy's overall operations.

    Comparative parameters
    Parameters Unit Dr.Reddy's Teva
    Sales US$ m 1,517 15,505
    Operating profit US$ m 291 4,472
    OPM (%) % 19.2 28.8
    Net profit US$ m 184 2,940
    NPM (%) % 12.1 19.0
    Return on equity** % 21.4 15.3
    D/E** Times 0.3 0.4
    Market cap US$ bn 6.3 46.9
    P/E   35.6 16.5
    ** Based on CY09/FY10 numbers

    How do the financials stack up?

    Teva's sales growth and margins have been better than Dr.Reddy's. This is on account of several reasons. First, Teva has a patented product in the market which has played an important role in bolstering sales growth and enhancing margins. Then, in the US generics market, based on its sheer size and product basket alone, Teva is the undisputed market leader there. It also has an enviable distribution network which is very important in the generics market given that most of the products are not branded. It is, however, important to note that a string of acquisitions have also done their bit in boosting Teva's performance. Dr.Reddy's performance has been bolstered by the emerging markets (including India) and the US. Although Germany so far has been a damp squib, the US is expected to be a major growth driver in the coming years simply because the company has many products lined up for launch. Quite a few of these are niche products have limited competition and should enable Dr.Reddy's in reporting healthy growth in sales and profits.

    But as far as valuations are concerned, the price to earnings multiple for Teva on a trailing 12 month basis is quite cheap as compared to Dr.Reddy's. Even though Teva's overall numbers have been better than Dr.Reddy's.



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