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Dr.Reddy’s: The ‘Imitrex’ boost - Views on News from Equitymaster
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Dr.Reddy’s: The ‘Imitrex’ boost
Jan 20, 2009

Performance summary
  • Revenues grow by an impressive 50% YoY in 3QFY09 driven by the successful launch of the authorized generic version of GSK Plc’s ‘Imitrex’ (‘Sumatriptan’) and key markets of North America and Russia.
  • A sharp fall in raw material costs leads to the 3.5% improvement in operating margins during the quarter.
  • All this put together percolates down to the bottomline, which registers an impressive 155% YoY growth.


Consolidated numbers
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 12,106 18,169 50.1% 36,514 49,000 34.2%
License fees and service income 291 294 1.2% 500 770 54.2%
Expenditure 10,508 14,999 42.7% 30,435 41,364 35.9%
Operating profit (EBDITA) 1,889 3,465 83.4% 6,579 8,407 27.8%
EBDITA margin (%) 15.6% 19.1%   18.0% 17.2%  
Other income 263 90 -65.9% 1,182 326 -72.4%
Interest (net) 210 276 31.9% 686 765 11.6%
Depreciation 931 1,234 32.6% 2,900 3,642 25.6%
Profit before tax 1,011 2,044 102.1% 4,176 4,326 3.6%
Tax 389 452 16.3% 579 949 63.8%
Minority interest 3 -   7 -  
Profit after tax/(loss) 625 1,592 154.5% 3,604 3,378 -6.3%
Net profit margin (%) 5.2% 8.8%   9.9% 6.9%  
No. of shares (m)       168.1 168.4  
Diluted earnings per share (Rs)         24.7  
Price to earnings ratio (x)         19.0  

What has driven performance in 3QFY09?
  • Dr. Reddy’s revenues in 3QFY09 grew by a robust 50% YoY. This was largely driven by the successful launch of the authorised generic version of GSK Plc’s ‘Imitrex’ (‘Sumatriptan’) and key markets of North America and Russia. Excluding the impact of ‘Imitrex’, overall revenues still managed to register a healthy 21% YoY growth.

    The superlative revenue growth in North America was a result of the 180-day exclusivity window garnered for ‘Imitrex’ beginning November 2008. Excluding the same, revenues grew by a robust 80% YoY driven by a high volume growth in its top products and acquisition of the Shreveport facility in the US. While the company launched 3 new products during the quarter, it filed 5 ANDAs thereby taking the total number of filings to 133. A total of 69 ANDAs are pending US-FDA approval having innovator sales of US$ 47 bn as per IMS December 2007. Out of these, around 32 are Para IV filings, 15 of which are first-to-file (FTF) opportunities having innovator sales of US$ 15 bn.

  • Sales from Europe witnessed a 4% YoY decline during the quarter. This was largely due to the 2% fall in revenues from Betapharm in Germany. The decline in revenues in Betapharm was attributed to destocking on account of the AOK tender and the withdrawal of ‘Olanzapine’ from the market. As far the latter is concerned, the product was launched in Germany towards the end of 2007. But with the German court ruling in favour of the innovator Eli Lilly, Dr.Reddy’s had to withdraw this product from the German market. Revenues from the rest of Europe were flat. The company launched 2 new products and filed 4 dossiers across Europe during the quarter.

    Consolidated business snapshot
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Global generics 8,000 13,700 71.3% 24,263 35,225 45.2%
    - North America 1,700 6,700 294.1% 5,558 12,746 129.3%
    - Europe 2,600 2,500 -3.8% 7,357 8,562 16.4%
    - India 2,000 2,000 0.0% 6,122 6,402 4.6%
    - Russia and other CIS 1,500 1,900 26.7% 4,467 5,728 28.2%
    - Others 200 600 200.0% 759 1,787 135.4%
    Pharma Services & Active ingredients 4,200 4,500 7.1% 12,320 14,012 13.7%
    Total 12,200 18,200 49.2% 36,583 49,237 34.6%

  • Revenues from Russia and the other CIS markets grew by 27% YoY during the quarter with Russia growing by 44% YoY driven by its key brands of Nise, Ketorol and Cetrine. Revenues in India remained flat at Rs 2 bn on account of the delay in the launch of new products and a change in the business model. The company has changed its reporting structure and has now clubbed the API business with the custom manufacturing business naming it Pharmaceutical Services and Active Ingredients (PSAI). Revenues from this business grew by 7% YoY during the quarter and driven by growth in Europe and the Rest of the World (ROW) markets.

  • Dr.Reddy’s operating margins improved by 3.5% during the quarter largely on account of lower raw material costs (as percentage of sales); the same was the result of higher margins earned due to the exclusivity window garnered for ‘Imitrex’. Having said that, the company made a provision of Rs 969 m as damages on account of the German court upholding the validity of the ‘Olanzapine’ patent due to which other expenditure (as percentage of sales) jumped from 14.9% in 3QFY08 to 21.4% in 3QFY09. All this percolated down to the bottomline which clocked an impressive 150% YoY growth despite the reduction in other income and higher interest costs. The fall in other income could be attributed to the forex loss of Rs 493 m in 3QFY09 as against a forex gain of Rs 87 m in 3QFY08.

    What to expect?
      At the current price of Rs 468, the stock is trading at a multiple of 12.4 times our estimated FY11 earnings. Going forward, Dr. Reddy’s focus on a stronger product flow in the US, growth in Betapharm, custom manufacturing business and other core businesses will be the key long-term drivers. The company is focusing on building a strong pipeline in the US market with the aim of launching around 15 products in this market every year. It is also aiming to garner the exclusivity window for atleast one product every year for the next five years.

      Betapharm continues to operate under clouds of uncertainty in the German market. While the company has bagged the AOK tender for 8 products translating into 33 contracts, legal issues surrounding the AOK tenders in general have caused some delay. Besides with Germany becoming more of a tender based market than a branded one, margins will be on the lower side. Therefore, volumes will be the key. Further, Betapharm’s top ten products in the German market currently are different from the contracts it has bagged for the 8 products. As a result of which, there is not much clarity on how the revenue growth those ten products will pan out in the near term. Overall, given the recent correction in prices, the stock looks attractive at the current levels.

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