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Dr. Reddy's: Betapharm 'impairs' profits - Views on News from Equitymaster
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Dr. Reddy's: Betapharm 'impairs' profits
May 18, 2009

Performance summary
  • Revenues grow by an impressive 38% YoY in FY09 driven by the successful launch of the authorised generic version of GSK Plc's 'Imitrex' ('Sumatriptan') and key markets of North America and Russia.
  • A sharp fall in raw material costs, R&D and selling expenses (as percentage of sales) leads to the 2.1% improvement in operating margins during the year.
  • Bottomline, however, reports a loss of Rs 9.2 bn at the net level largely due to an extraordinary expense of Rs 14.6 bn, which is the impairment loss with respect to intangible assets and goodwill related to Betapharm. Excluding the same, net profits grow by 24.5% YoY.
  • The Board recommends a dividend of Rs 6.25 per share (dividend yield of 1%).


Consolidated numbers
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Net sales 12,627 18,903 49.7% 49,142 67,904 38.2%
License fees and service income 276 332 20.7% 775 1,103 42.3%
Expenditure 11,093 14,623 31.8% 41,528 55,987 34.8%
Operating profit (EBDITA) 1,810 4,613 154.8% 8,389 13,019 55.2%
EBDITA margin (%) 14.3% 24.4% 17.1% 19.2%
Other income 855 668 -21.9% 2,038 994 -51.2%
Interest (net) 273 206 -24.3% 958 972 1.4%
Depreciation 1,119 1,336 19.4% 4,019 4,978 23.9%
Profit before tax 1,274 3,738 193.4% 5,450 8,064 48.0%
Exceptional items - (14,628) - (14,628)
Tax 498 1,660 233.2% 1,077 2,608 142.2%
Minority interest 2 - 9 -
Profit after tax/(loss) 778 (12,550) 4,381 (9,172)
Net profit margin (%) 6.2% -66.4% 8.9% -13.5%
No. of shares (m) 168.2 168.5
Diluted earnings per share (Rs)* 32.4
Price to earnings ratio (x) 18.5
* excluding extraordinary items

What has driven performance in FY09?
  • Dr. Reddy's revenues in FY09 grew by a robust 38% 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 24% YoY growth.

  • The 148% YoY revenue growth in North America during the year was a result of the 180-day exclusivity window garnered for 'Imitrex' beginning November 2008. Excluding the same, revenues grew by a robust 58% YoY driven by a high volume growth in its top products and acquisition of the Shreveport facility in the US. While the company launched 16 new products during the year, it filed 20 ANDAs thereby taking the total number of filings to 144. A total of 69 ANDAs are pending US-FDA approval having innovator sales of US$ 46 bn as per IMS December 2008.

  • Sales from Europe witnessed a 17% YoY growth during the year. This was largely driven by the 20% YoY growth in revenues from Betapharm in Germany led by volume growth in existing products and the one off seasonal vaccine sales during the second quarter. Revenues from the rest of Europe were flat. The company launched 25 new products and filed 11 dossiers across Europe during the year.

    Consolidated business snapshot
    Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Global generics 8,737 14,575 66.8% 33,000 49,800 50.9%
    - North America 2,442 7,054 188.9% 8,000 19,800 147.5%
    - Europe 2,843 3,338 17.4% 10,200 11,900 16.7%
    - India 1,978 2,098 6.1% 8,100 8,500 4.9%
    - Russia and other CIS 1,033 1,872 81.2% 5,500 7,600 38.2%
    - Others 441 213 -51.7% 1,200 2,000 66.7%
    Pharma Services & Active ingredients 4,280 4,788 11.9% 16,600 18,800 13.3%
    Total 13,017 19,363 48.8% 49,600 68,600 38.3%

  • Revenues from Russia and the other CIS markets grew by 38% YoY during the year with Russia growing by 43% YoY driven by its key brands of Nise, Ketorol, Omez and Cetrine. Revenues in India reported a tepid 5% YoY growth on account of the delay in the launch of new products and a change in the business model. The company changed its reporting structure during the year 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 13% YoY during the year driven by growth in North America and the Rest of the World (ROW) markets as well as the depreciation of the rupee against the dollar.

  • Dr.Reddy's operating margins improved by 2.1% during the year largely on account of lower raw material costs, R&D and selling expenses (as percentage of sales). Raw material costs were lower due to higher gross margins earned on the product 'Imitrex', for which it received the exclusivity window. Having said that, the company had to pay Rs 921 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 FY08 to 17.2% in FY09.

  • Bottomline reported a loss of Rs 9.2 bn at the net level largely due to an extraordinary expense of Rs 14.6 bn, which was the impairment loss with respect to intangible assets and goodwill related to Betapharm. Excluding the same, net profits grew by 24.5% YoY. This growth was at a lower pace as compared to the 55% YoY growth in operating profits on account of considerable reduction in other income, which could be attributed to the forex loss of Rs 634 m in FY09 as against a forex gain of Rs 739 m in FY08.

What to expect?
At the current price of Rs 599, the stock is trading at a multiple of 17.3 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. While the Indian business did not do too well in FY09, the restructuring exercise is expected to start yielding benefits from 2QFY10.

Betapharm continues to operate under clouds of uncertainty in the German market. That said, the company has bagged the AOK tender for 8 products translating into 33 contracts, and with legal issues surrounding the AOK tenders out of the way, product launches are expected to take place in FY10. However, 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. Overall, the company has done much better than our estimates and we shall have to upgrade our numbers accordingly. We shall soon update our research report on the company.

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