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Dr Reddy's: 'Olanzapine' drives growth - Views on News from Equitymaster

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Dr Reddy's: 'Olanzapine' drives growth

Feb 17, 2012

Dr Reddy's has announced its third quarter results for 2012 (3QFY12). The company has reported 45.9% YoY and 87.7% YoY growth in sales and profit after tax respectively. Here is our analysis of the results.

Performance summary
  • Sales grow by 45.9% YoY led by strong rise in the global generics business led by strong numbers from North America (NA) due to the launch of Olanzapine drug. The bulk drugs (PSAI) division also grows well, however, the domestic sales growth is relatively poor
  • Operating margins (EBITDA) increase significantly by 1,140 bps (11.4%) mainly due to higher contribution from exclusivity sales of Olanzapine 20 mg from NA
  • Profit after tax grows by 87.7% YoY and is lower than the growth in operating profits on account of a surge in tax expenses.

Financial performance: A snapshot
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Net sales 18,985 27,692 45.9% 54,520 70,153 28.7%
Expenditure 15,183 19,004 25.2% 43,248 52,831 22.2%
Operating profit (EBIDTA) 3,803 8,688 128.5% 11,272 17,322 53.7%
EBDITA margin (%) 20.0% 31.4%   20.7% 24.7%  
Other income 198 165 -16.7% 603 567 -6.0%
Depreciation 1,066 1,306 22.5% 3,090 3,808 23.3%
Interest 50 (174)   262 (78)  
Profit before tax 2,885 7,721 167.6% 8,524 14,159 66.1%
Tax 152 2,617 1622.7% 836 3,367 302.8%
Minority Interest (1) 26   7 43  
Profit after tax/(loss)  2,732 5,130 87.7% 7,695 10,835 40.8%
Net profit margin (%) 14.4% 18.5%   14.1% 15.4%  
No. of shares (m) 169 169   169 169  
Diluted earnings per share (Rs)*   83.3        
Price to earnings ratio (x)*   19.6        
*On trailing 12 month basis

What has driven performance in 3QFY12?
  • Dr Reddy's sales grew by 45.9% YoY during 3QFY12 led by strong growth in the global generics and bulk drugs (PSAI) division. However, the domestic sales growth was quite poor. The global generics division grew by 56.7% on back of strong numbers from the North American business which grew by 133% YoY. This strong performance was led by higher realization from the newly launched Olanzapine drug for which the company has an exclusivity period. The total sales in the quarter for Olanzapine were US$ 99 m. The PSAI (bulk drugs) division growth of 18.9% YoY was driven across geographies. However, the domestic formulations growth was muted at 11%, much lower than the industry average of 13%-14%.

    Revenue break-up
    (Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
    PSAI 5,849 6,958 18.9% 16,464 19,895 20.8%
    Global Generics 13,588 21,287 56.7% 39,172 51,846 32.4%
    Proprietary Products 162 324 100.1% 415 784 88.9%
    Others 256 517 102.2% 837 1,194 42.7%
    Total Sales 19,855 29,086 46.5% 56,888 73,720 29.6%
    Less: Inter-segmental 870 1,394 60.2% 2,368 3,567 50.6%
    Net revenues 18,985 27,692 45.9% 54,520 70,153 28.7%

  • Operating margins (EBITDA) increased significantly by 1,140 bps (11.4%) mainly due to higher margins enjoyed in the exclusivity period from sales of Olanzapine 20 mg. Sales from the newly launched drug was pegged at US$ 99 m (~Rs 5 bn). Excluding the revenue from the Olanzapine drug and forex gains, the base business margins declined nearly by 100 bps due to increased costs of marketing and selling in Russia and CIS countries.

  • Dr Reddy's profit after tax increased by 87.7% YoY, lower than the operating profit growth due to higher taxes compared to the same period previous year. The tax rate in the current quarter stood at 33.8%.

  • In the US market, Dr Reddy's filed 3 ANDAs in this quarter and the total filing stands at 187 ANDAs. Out of this 79 ANDAs are pending approvals (40 are PARA IV and 10 FTFs). Fondaparinux, the generic version of Arixtra, has increased its market share from 10% to 18% in the US in this quarter. The company further expects to increase market shares after its production issues are resolved properly. For the Indian market, the company launched 6 new products.

What to expect?
At the current price of Rs 1,635, the stock is trading at a price to earnings multiple of 16.8 times our estimated FY14 earnings. The management expects the growth to be driven from the North American market. This will be triggered by increasing market share of products like Fondaparinux, Olanzapine and Fexofenadine OTC. The new penicillin facility acquired from GSK will further help.

In order to capitalize on the blockbuster drugs going off patent over the next few years, the company is focusing on building a strong pipeline in the US. For which the company has filed a lot of Para-IV applications. Apart from that, the custom manufacturing business and other core businesses will also help on a long-term basis. Having said this, in the medium term, the domestic formulations business is not expected to do well due to factors like high attrition at around 25% and intense pricing pressure from MNCs and local players. Considering all these factors, current valuations do not leave much on the table for investors.

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