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Dr. Reddy’s: ‘Imitrex’ drives growth - Views on News from Equitymaster
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Dr. Reddy’s: ‘Imitrex’ drives growth
Jul 21, 2009

Performance summary
  • Revenues grow by an impressive 20% YoY in 1QFY10 driven by the drug ‘Imitrex’ (‘Sumatriptan’) and key markets of North America and India.
  • A sharp fall in raw material costs, R&D and other expenses (as percentage of sales) leads to the substantial 9.8% improvement in operating margins during the quarter.
  • Betapharm reports a 36% YoY decline in revenues thereby dragging down overall revenues from Europe.
  • Bottomline records a splendid 160% YoY growth mainly due to the strong performance at the operating level, and reduction in interest costs and depreciation charges.

Consolidated numbers
(Rs m) 1QFY09 1QFY10 Change
Net sales 14,813 17,788 20.1%
License fees and service income 174 420 141.2%
Expenditure 12,826 13,868 8.1%
Operating profit (EBDITA) 2,161 4,341 100.9%
EBDITA margin (%) 14.6% 24.4%  
Other income 489 186 -62.1%
Interest (net) 226 122 -45.8%
Depreciation 1,180 1,031 -12.6%
Profit before tax 1,245 3,372 170.9%
Tax 325 983 202.6%
Profit after tax/(loss) 920 2,389 159.7%
Net profit margin (%) 6.2% 13.4%  
No. of shares (m) 168.3 168.7  
Diluted earnings per share (Rs)*   41.1  
Price to earnings ratio (x)   19.2  
* excluding extraordinary items

What has driven performance in 1QFY10?
  • Dr. Reddy’s revenues in 1QFY10 grew by a robust 20% YoY. This was largely driven by the authorised generic version of GSK Plc’s drug ‘Imitrex’ (‘Sumatriptan’), which was launched in the latter half of FY09 and key markets of North America and India. Thus, excluding the impact of ‘Imitrex’, overall revenues grew by a subdued 7% YoY.

  • The 115% YoY revenue growth in North America during the quarter was a result of the 180-day exclusivity window for 'Imitrex' beginning November 2008. Excluding the same, revenues still grew by a robust 42% YoY driven by a high volume growth across existing products. While the company did not file any ANDAs during the quarter, a total of 67 ANDAs are pending US-FDA approval having innovator sales of US$ 68 bn, of which 28 are Para IVs and 16 are FTFs (first-to-file). These FTFs address a market size of US$ 9 bn.

  • Sales from Europe declined by 30% YoY during the quarter. This was largely due to the 36% YoY decline in revenues from Betapharm on account of the effect of de-stocking in the market ahead of the AOK tender sales. The dynamics of the German generics market has changed from being a branded generics one to a tender based one. Betapharm had won the AOK tender for 8 products encompassing 33 contracts. Supplies for this tender commenced during the quarter and a significant increase in volumes of these products was witnessed, whereas the volumes for non-AOK products fell. Revenues from the rest of Europe grew by 6% YoY largely contributed by the UK, which grew by 23% YoY.

    Consolidated business snapshot
    (Rs m) 1QFY09 1QFY10 Change
    Global generics 10,287 13,020 26.6%
    - North America 2,808 6,026 114.6%
    - Europe 2,994 2,109 -29.6%
    - India 2,202 2,393 8.7%
    - Russia and other CIS 1,928 1,871 -3.0%
    - Others 355 621 74.9%
    Pharma Services & Active ingredients 4,613 4,870 5.6%
    Proprietary products & Others 138 300 117.4%
    Total 15,038 18,190 21.0%

  • Revenues from Russia and the other CIS markets declined by 3% YoY. Revenues from Russia were flat while revenues from the other CIS markets declined by 20% YoY. Revenues from India grew by 9% YoY growth on account of key brands of Omez, Nise and Razo. 14 new products were also launched during the quarter. Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) business grew by 6% YoY during the quarter driven by growth in Europe 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 9.8% during the quarter largely on account of lower raw material costs, R&D and other 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. The other expenses increased in absolute terms by 5% YoY during the quarter on account of one-off items such as the exit costs of sales force at Betapharm and the cl0sure of the Atlanta research facility. Thus, excluding the same, the growth in these costs were lower. Also, the last quarter included provision for damages on account of the German court upholding the validity of the ‘Olanzapine’ patent in Germany which was not present this quarter.

  • Bottomline reported a robust 160% YoY growth mainly due to the strong performance at the operating level and lower interest costs and depreciation charges. This is despite the reduction in other income and increase in tax expenses. Fall in other income could be attributed to the forex loss of Rs 84 m recorded during the quarter as against a gain of Rs 176 m in 1QFY09.

What to expect?
At the current price of Rs 755, the stock is trading at a multiple of 13.2 times our estimated FY12 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. While the company has bagged the AOK tender for 8 products translating into 33 contracts, Betapharm’s revenues in FY10 will be lower than that of FY09. Further, with Germany becoming more of a tender based market than a branded one, margins will be on the lower side. Therefore, volume growth and cost cutting will be the key. As far as the latter is concerned, the company has shifted the manufacturing of the majority of its products to India and is also reducing its staff strength in that market. The company had guided for a 10% YoY growth in revenues in FY10, which will be driven by North America, India, the semi-regulated markets and the custom manufacturing business. We maintain our positive view on Dr.Reddy’s.

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