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What Dr Reddy's will get out of 'Fondaparinux' - Views on News from Equitymaster
 
 
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  • Oct 10, 2012

    What Dr Reddy's will get out of 'Fondaparinux'

    The next three years are a gold mine for Indian generic players as the opportunity in terms of drugs facing patent expiries is huge. This is especially in the US. That said, as big blockbuster drugs lose patents, competition intensifies as more and more generic companies vie for a slice of that drug. Hence, those companies focusing on niche products certainly end up having an edge. Keeping this in mind, in today's article, we have tried to analyze the impact of one such niche drug for Dr Reddy's, notably 'Fondaparinux'.

    Some facts on 'Fondaparinux'

    Alchemia is the company which has developed the generic version of Arixtra (fondaparinux). Later, this company entered into an agreement with Dr Reddy's for manufacturing and marketing of the product. This drug is in injection form and is used for the treatment of deep vein thrombosis (DVT - a condition in which patient gets blood clot in the deep vein) and pulmonary embolism (PE- blockage in main artery of lung or one of the branches by substance, PE most commonly results from DVT). It is tough for this drug to clear approval owing to its safety issues. Thus this acts a high entry barrier for other generic players wanting to enter this field.

    Under the agreement, Alchemia is eligible for atleast 50% and maximum of up to 60% of profits from product sales in the US. Both the companies have also signed agreements for various other geographies.

    What Dr.Reddy's gets out of this drug

    For Dr Reddy's, Fondaprinux contributed around 5% to its US revenues (FY12). The company had launched this product in the US in July 2011. We have briefly analyzed the performance of this product over a year.

    The company's partner Alchemia recently announced its first profits from Fondaparinux. Alchemia received profits of around US$ 1.25 m from Dr Reddy's. Based on this we have arrived at PAT margins of 1% for fondaparinux, after deducting costs pertaining to collaboration,devlopment and marketing agreement. As per Dr.reddy's management the gross margins of the product are in the range of the company's overall gross margins. Further, the net margins for FY12 should not be looked as trend for the coming quarters, as these include various historical costs.

    Table 1 - Dr Reddy's Fondaparinux Performance July '11 - June-12'
    Particulars  
    Brand sales* of Fondaparinux (Brand Name Arixtra) - US$ m 340
    Retail market size 40%
    Retail market Size - US$ m 136
    Dr Reddy's market share 40%
    Price erosion 40%
    Revenues for Dr Reddy's - US$ m 33
    Profit shared with Alchemia - US$ m 0.1
    % profit shared with Alchemia (assumed) 50%
    Total profits - US$ m 0.3
    Profit margin of Fondaparinux 1%
    Source - Company reports
    * Sales before Generics entered the market

    Going forward, performance will be driven by:
    1. Improvement in retail market share: Out of the total brand sales of Fondaparinux, the retail market accounts for ~40% while the balance is the hospital market. Dr Reddy's has captured a share of 40% of the retail market.

    2. Upsides from the hospital market: The company is yet to penetrate this market and this will also be dependent on the progress it makes on the cost improvement front. This is because the Hospital market looks for low cost options and thus it is tough to generate healthier margins from this segment.

    3. Improving manufacturing costs: Dr Reddy's and Alchemia are working on reducing the manufacturing costs of the drug, and thus both companies have jointly invested US$ 20 m. As per Dr Reddy's management, the yields have improved considerably on the back of this investment.
    Currently there are three companies in the US selling the drug viz; GSK Plc (Innovator), Apotex (Authorized Generic - right given by the innovator to sell generics) and Dr Reddy's (First generic company to get the USFDA approval).

    In the future, both the companies are also looking to enter other geographies. Dr.Reddy's expects approval from the European geography to come in 12 months, and this will further drive the product growth.

    Our view

    We believe, this is a niche launch for Dr Reddy's, and the market share will ramp up going forward with the expansion in hospital segment. However, the margin improvement will be highly dependent on the cost productivity that the company is able to deliver.

      Bhavita Nagrani (Research Analyst) is a Chartered Financial Analyst (ICFAI) with nearly six years of experience in the field of equity research. She has a deep understanding of the global as well as the domestic Healthcare industry and keenly tracks the developments therein. When it comes to stock investing, she is a strong advocate of the bottom-up approach to stock picking and has a remarkable ability to discern nuances in the business models of companies belonging to the same industry. Bhavita is the contributor to our large cap franchise, StockSelect.

     

     

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