Dr. Reddy's has reported an outstanding all round performance for the first quarter of FY03. Continued buoyancy in sales coupled with improving margins have led to strong earnings growth for the company. Dr.Reddy's has disclosed global consolidated revenues as per US GAAP. On a consolidated basis, the company reported a stupendeous 115% rise in net profits and a 51% growth in revenues on the back of strong growth in API's (Active Pharma Ingredients) and continued progress in the generics business.
Since the company has booked considerable chunk of its revenues through US subsidiaries, it makes more sense to analyse the consolidated revenues. On a consolidated basis, the company has reported a net profit of Rs 1,212 m, profits on a standalone basis are Rs 801 m. This effectively means that the company has booked a substaintial Rs 411 m of net profits between its US and UK subsidiaries. Management clarified that huge clincial development and legal expenses cost abroad seems to be the rationale for booking a considerable chunk of revenues in the subsidiaries books. It may be recalled that the company recently took over the formulations business of BMS Labs in UK. The company is utilising BMS Labs for launching new product in the UK.
The highlight of the quarterly performance was an unexpected 44% rise in the API business driven mainly by sales to Europe and US. US API sales leapfroged 73% on account of export consigments for small quantities of two key products (Tizanidine and Doxazosin), which contributed 33% to the API revenues. Revenues from API exports are expected to catapult in the future considering the fact that the company has filed 3 DMF's (Drug Master Filings) in the last quarter and expected to file 4 more in the currrent quarter.
Coming to branded formulations, the company reported an overall 16% growth with both domestic and International business performing well. The growth in the domestic market was driven by performance of its key products like Nise and Stamlo Beta. It may be recalled that the company acquired 6 dental brands in India from a local Indian company (Groupe Pharma) last year, which also added to domestic formulations sales in the current quarter.
The quarterly sales for generics business does not include any extra-ordinary one time revenues. The marketing exclusivity over fluoxetine ended in January '02. Fluoxetine sales, however, contributed over 75% of the generics turnover at Rs 798 m (US $ 16 m), far above our expectations. It may be recalled that the company markets fluoxetine in the US through its partner Par Pharma with a 50: 50 profit sharing agreement. Revenues, in the US subsidiary's books, are recorded as and when sale confirmation is received from Par pharma, which could have a lag effect. The company currently enjoys 40% market share in fluoxetine. However, the price erosion has been sharp (almost 80%) and two other competitiors have entered the market. Considering the same, revenues from fluoxetine are unlikely to be sustained.
Going forward, break through in speciality pharma business is expected to fuel growth. This includes some difficult to manufacture products and branded products for the US markets. It may again be recalled that the company has filed application under section 505 (b) for marketing generic version of Pfizer's multi-billion dollar product 'Amolipine Maleate'. (Section 505 (b) allows three years of generic exclusivity for certain changes in the dosage forms or combinations, which are accompanied by new clinical study). This is a very big opportunity for the company and we expect revenues of Rs 3.7 bn (US $ 77 m) in first year of the product's launch. Going by this argument, put forward by the management, the company seems to be confident of launching the product by the next financial year. The company has mentioned that Maleate will be the key product driving their speciality segment initiatives in USA. Considering the size of the product with huge margins, financial markets would be eagerly watching the developments on the Amlodipine front.
The R&D expenses of the company have risen from Rs 62 m to Rs 205 m largely driven by clinical trial costs. The research budget of the company is likely to remain buoyant going forward, as the company intends to gear up its clinical trials and regulatory filings in the US. The R&D spend as a % of sales is expected to remain in the range of 7.5 - 8% of sales going forward. It may be recalled that the company received a major setback recently with the suspension of clinical trials for its outlicensed anti-diabetic molecule (Ragaglitazar). There have been concerns, offlate, that management has delayed disclosure of Ragaglitazar facts.
The company has posted an EPS of Rs 15.9 for the first quarter, which is well above market expectations. Partially, this is likely to get corrected, as sales and profitability from fluoxetine taper down in the ensuing quarters. However, export growth story of the company remains in place with continuing generics monentum and the company penetrating further into new geographies. We would soon be revising our estimates upwards on the back of the splendid performance recorded by the company in the first quarter. In the near term, a breakthrough in the speciality pharma segment, especially from amlodipine maleate could drive sentiment for the stock. The stock price of the company may bounce back after witnessing a free fall last forthnight following disappointment over the Ragaglitazar molecule.
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