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Dr. Reddy's: US, Europe disappoint - Views on News from Equitymaster
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Dr. Reddy's: US, Europe disappoint
May 6, 2010

Dr.Reddy’s has announced its FY10 results. The company has reported 1% YoY growth in sales and net profit of Rs 3.5 bn as against a loss in FY09. Here is our analysis of the results.

Performance summary
  • Revenues grow by a mere 1% YoY in FY10 largely due to decline in sales from the US and Europe.
  • A fall in R&D and other expenses (as percentage of sales) leads to the 1.7% improvement in operating margins during the year.
  • Profit before tax grows by an impressive 34% YoY due to a considerable reduction in interest costs.
  • The company reports a profit of Rs 3.5 bn at the net level as compared to a loss in FY09. The loss last fiscal was on account of impairment of intangible assets and goodwill related to Betapharm. On excluding the exceptional items from both the periods, net profits grow by 48% YoY.

Consolidated numbers
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales 19,282 15,689 -18.6% 67,904 68,516 0.9%
License fees and service income 447 769 72.2% 1,595 2,407 50.8%
Expenditure 14,622 13,517 -7.6% 55,986 56,118 0.2%
Operating profit (EBDITA) 5,106 2,941 -42.4% 13,513 14,805 9.6%
EBDITA margin (%) 26.5% 18.7%   19.9% 21.6%  
Other income 175 (67)   501 404 -19.4%
Interest (net) 206 39 -81.1% 972 312 -67.9%
Depreciation 1,336 988 -26.0% 4,978 4,131 -17.0%
Profit before tax 3,739 1,846 -50.6% 8,065 10,766 33.5%
Exceptional items 14,628 -   14,628 4,583 -68.7%
Tax 1,660 788 -52.5% 2,608 2,668 2.3%
Profit after tax/(loss) (12,549) 1,058   (9,171) 3,515  
Net profit margin (%) -65.1% 6.7%   -13.5% 5.1%  
No. of shares (m)       168.5 168.8  
Diluted earnings per share (Rs)*         48.0  
Price to earnings ratio (x)         25.9  
* excluding extraordinary items

What has driven performance in FY10?
  • Dr. Reddy’s revenues in FY10 grew by a dismal 1% largely due to decline in revenues from the generics business in the US and Europe. However, the branded generics business in the emerging markets did well to support Dr.Reddy’s overall sales. The North American generics business saw a 15% YoY decline in revenues. There were several reasons for this. One was that in FY09, Dr.Reddy’s enjoyed benefits of the 180-day exclusivity for the blockbuster drug ‘Imitrex’. There being no such exclusivity during FY10, revenues from this region took a hit. Second was the delay in product launches as well as the impact of certain batches of 4 products which had to be recalled from the US market. Sales of the global generics business (excluding ‘Imitrex’) stood at 8% YoY led by the branded generics market. As far as the US business is concerned, the company now has a total of 73 ANDAs pending US-FDA approval of which 38 are Para IVs and 12 are FTFs (first-to-file). Sales from Europe declined by 19% YoY during the year largely due to the continuing pricing pressures that Betapharm faced in Germany. Betapharm’s revenues declined by 26% YoY during the year.

    Consolidated business snapshot
    (Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
    Global generics 25,819 23,861 -7.6% 49,789 48,605 -2.4%
    - North America 10,384 7,817 -24.7% 19,843 16,817 -15.2%
    - Europe 6,386 4,955 -22.4% 11,886 9,643 -18.9%
    - India 4,309 5,133 19.1% 8,478 10,158 19.8%
    - Russia and other CIS 3,689 4,479 21.4% 7,623 9,119 19.6%
    - Others 1,051 1,477 40.5% 1,959 2,868 46.4%
    Pharma Services & Active ingredients 9,687 10,297 6.3% 18,758 20,404 8.8%
    Proprietary products & Others 495 632 27.7% 893 1,268 42.0%
    Total 36,001 34,790 -3.4% 69,440 70,277 1.2%

  • Revenues from Russia and the other CIS markets grew by 20% YoY. Revenues from Russia grew strongly by 25% YoY while revenues from the other CIS markets grew by 4% YoY. Revenues from India grew by 20% YoY growth led by volume growth across products and new product launches. 62 new products were launched during the year which accounted for 5% of FY10 sales. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business grew by 9% YoY during the year.

  • Dr.Reddy’s operating margins improved by 1.7% during the year largely on account of lower R&D and other expenses (as percentage of sales). The other expenses were lower this year, as in FY09 these included provision for damages on account of the German court upholding the validity of the ‘Olanzapine’ patent in Germany which was not present this year. Also, the company recorded forex gain of Rs 72 m during the year as compared to forex loss of Rs 634 m in FY09.

  • Dr.Reddy’s reported profit at the net level of Rs 3.5 bn as against a loss of Rs 9 bn in FY09. During both the years, Dr.Reddy’s had recorded extraordinary items due to the writedown of intangible assets, the ‘beta’ brand and goodwill. While this figure stood at Rs 14.6 bn in FY09, it was significantly lower at Rs 4.6 bn in FY10. Significant deterioration in drug prices and the change in the dynamics of the German generics market from a branded to a tender based one is what prompted this move in both the years. On excluding this from both the periods, bottomline reported a robust 48% YoY growth mainly due to a significant reduction in interest costs and improvement in operating margins. Interest costs reduced as Dr.Reddy’s had repaid a significant part of the Euro loan that they had taken to fund the acquisition of Betapharm.

What to expect?
At the current price of Rs 1,241, the stock is trading at a price to earnings multiple of 18 times our estimated FY12 earnings. Going forward, Dr. Reddy’s focus on a stronger product flow in the US, 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 and this market is expected to be the key growth driver over the next 3 years as the company looks to capitalise on the wave of blockbuster drugs going off patent and niche product opportunities.

Betapharm continues to operate under clouds of uncertainty in the German market. With Germany becoming more of a tender based market than a branded one, sales and margins will be on the lower side in the medium term atleast. Overall, the company is looking to achieve sales of US$ 1.3 bn by FY13 with the US market being the key contributor. The company has underperformed our estimates and we shall have to downgrade our estimates for the full year to that extent. We shall soon update our research report on the company.

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