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Dr. Reddy's: Stellar Performance

Nov 1, 2001

Dr. Reddy has recorded an exciting 104% growth in sales and a 420% growth in profit before tax for 2QFY02. Operating margins have leapfrogged to 49.4% in the concerned quarter from 25.9% last year. The performance of the company is much above market expectations. The figures for the current quarter is on a consolidated basis with Cheminor drugs and American Remedies. To provide meaningful comparison, previous quarter numbers are also on a consolidated basis. The surge in revenues and profits was mainly fuelled by generic fluoxetine and other export formulations.

(Rs m) 2QFY01 2QFY02 % change 1HFY01 1HFY02 % Change
Sales 2,429 4,943 103.5% 4,575 7,782 70.1%
Other Income 82 204 149.5% 153 290 89.9%
Expenditure 1,799 2,501 39.0% 3,535 4686 32.5%
Operating Profit (EBDIT) 630 2,442 287.7% 1,040 3,096 197.8%
Operating Profit Margin (%) 25.9% 49.4%   22.7% 39.8%  
Interest 118 14 -87.9% 232 64 -72.3%
Depreciation 111 122 9.4% 197 234 19.1%
Profit before Tax 483 2,510 420.1% 764 3,087 304.0%
Extraordinary Exp/(Income) - 1,083   - 1,083  
Tax Provision/(Deferred benefit) net 55 -8 -114.5% 87 34 -61.1%
Profit after Tax/(Loss) 427 1,435 235.9% 677 1,970 191.1%
Net profit margin (%) 17.6% 29.0% 14.8% 25.3%
No. of Shares (eoy) (m) 74.0 74.0   74.0 74.0  
Fully Diluted Earnings per share* 23.1 77.6   18.3 53.2  
P/E (at current price) 21.8   31.7  
(**- annualised)            

The current quarter witnessed a marked shift in the business mix of the company. Generics business which started with modest sales in 1QFY02 contributed more than 39% of the total turnover. This was mainly fuelled by fluoxetine 40 mg capsules contributing around 35% to the total turnover of the company i.e Rs 1,639 m (US$ 35 m). It may be recalled that Dr. Reddy's received a para IV certifications (which entitles the company to have 180 days generic marketing exclusivity) for fluoxetine in last quarter. The current quarter seems to reflect 60 days (of the 180 days exclusivity) of generic fluoxetine sales. The 180-day marketing exclusivity for Fluoxetine runs between August 2001 and February 2002. The conversion rate for fluoxetine i.e. switch from branded Prozac has been on a steep rise in the last two months and currently stands at around 80%. i.e. 80% of total prescribed sales of the drug in the US is marketed by Dr. Reddy's. The company has recently also received final approval for marketing famotidine and Enalapril tablets in the US. Dr. Reddy's now has a total of 14 ANDA filings including 5 Para IV certifications.

The company also received Rs 236 m (US$ 5 m) from Novartis as upfront payment for the licensing of its diabetic molecule which has been included in the sales revenues.Excluding one time receipt for upfront payment and sales of fluoxetine, revenues have jumped 26%. Domestic formulations sales grew by 7% more or less in line with domestic pharma market growth.

Dr. Reddy's is currently trading at Rs 1,115 on 1HFY02 annualised earnings multiple of 21x. It may be noted however, that the sales of fluoxetine for last two months should not be taken as indicative of next four months exclusivity sales. The sales of the drug are through the company's marketing tie-up with Par Laboratories. It may be the case that Par Laboratories may have stocked up the drug in anticipation of sales. We would be revising our earnings estimates shortly inview of milestone payment receipt and bigger breakthrough in the generics market.

The company has also declared a special interim dividend of 100% I.e. Rs 5 per share.

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