Dr. Reddy’s: The generic effect - Views on News from Equitymaster

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Dr. Reddy’s: The generic effect

Jan 9, 2002

Dr. Reddy’s is expected to report another spectacular quarterly performance for 3QFY02. While sales (incl. milestone receipts) is expected to record a jump of more than 85%, net profit is likely to explode with a 331% rise. Operating margins are likely to record a quantum jump, mainly due to a larger contribution from high margin generic exports. The spurt in export margins is expected on the back of exports of generic fluoxetine to the US markets. It may be recalled that Dr. Reddy’s received six month marketing exclusivity for this drug (Para IV) in August’01. The company had recorded sales of Rs 1,639 m in the last quarter from sales of fluoxetine with very high operating margins. We expect fluoxetine sales to record revenues of around Rs 950 m in 3QFY02 due to earlier stock build up.

Dr. Reddy’s: High Voltage Performance
(Rs m) 3QFY01 3QFY02E % change
Sales 2,144 3,977 85.5%
Operating Profit (EBDIT) 457 1,556 240.9%
Operating Profit Margin (%) 21.3% 39.1%  
Profit after Tax/(Loss) 320 1,377 331.0%
Net profit margin (%) 14.9% 34.6%  
Fully Diluted Earnings per share* 17.3 74.4  

Dr. Reddy’s is also expected to receive a milestone payment of US $ 2.5 m from Novo Nordisk. This milestone receipt has been triggered by DRF- 2725 entering Phase III in Nov’01. Excluding sales of fluoxetine and receipt of milestone payments, sales growth is expected to be 36%. This is also because of the merger effect with American remedies.

At the current market price of Rs 970, the stock trades at a P/e of 15x its expected earnings for FY02. However, one should also keep in mind that supernormal profits are expected to vanish from 4QFY02, as the company loses marketing exclusivity over fluoxetine. The spurt in operating margins was mainly because a six-month Para IV approval ensures high profit margins, due to absence of generic competition. Next Para IV application for the company is atleast 24 months away.

Armed with huge cash reserves, an acquisition of a marketing company in the US may be in the offing. On the R&D front, DRF – 2725, the anti-diabetes molecule licensed to Novo Nordisk is at advanced trial stage before entering the commercialization stage. This could trigger huge royalty for the company (though disappointment on this front even at this stage cannot be ruled out.)

Comparative Valuation
Particulars CMP P/e Mkt.Cap
  (Rs.) 2002E 2003E (In Mn.)
Ranbaxy 726 24.4 24.5 84,143
Cipla 1180 28.4 22.1 70,800
Dr.Reddy's 970 14.5 24.7 74,108

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