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Dr Reddy’s: Near-term concerns fail to deter investors

Dr Reddy’s Laboratories continues to gain steadily on the bourses aided by growth momentum in its US generics business.

It scaled to an all-time high of Rs 2,974.95 on Monday despite the news of a competitor (InnoPharma) receiving approval for generic launch of blood dysfunction treatment drug, Decitabine.

The product is single largest contributor for Dr Reddy’s and clocked sales of about $ 77 million (Rs 462 crore) in FY14. Hitesh Mahida at Antique Broking says the drug with a market size of about $ 300 million was expected to contribute about five% to the company’s earnings in FY15.

While the product approval makes it a three-player market, InnoPharma and its marketing partner, Sandoz, are the real threat for Dr Reddy’s given that Sun Pharma’s (third player) product is not the exact generic substitute. While the market had anticipated some competition, larger than expected market share gains for the new players can entail a revision in analysts’ earnings estimates for Dr Reddy’s.

The US FDA accepting drug applications from Natco and Momenta Pharma for launch of multiple sclerosis drug Copaxone (market size $ 411 million) is another concern. Dr Reddy’s was the sole first-to-filer with a 180-day marketing exclusivity.

But, if either or both the companies also get first-to-file status as they are claiming now, upsides from the drug for Dr Reddy’s will be capped.

However, despite these hurdles, analysts are positive on the company’s growth prospects given strong drivers from the US pipeline and continued momentum from India (second month of faster-than-industry growth) and Russia, its biggest markets after the US.

Although Decitabine generics coming under competition may have some impact, the same can be mitigated by other products that are growing well, both in terms of volumes and market share.

The 6K Filings released by the company for June 2014 quarter show generics of Vidaza (cancer treatment injectible contributing nine% to US revenue) growing 41% sequentially.

Vidaza is not far behind Decitabine (12% contribution). The three key injectibles — Reclast/Zometa (for treating Osteoporosis), Dacogen (Decitabine) and Vidaza – contributed 26% to Dr Reddy’s US revenue.

The other generic of neurological treatment brand Depakote-ER growing 50% sequentially also saw its contribution increase to 6% of US revenue.

Analyst at JPMorgan say that while the US business will see high base (last year) for the next two quarters, continued momentum in injectibles and market share gains in select products should support growth trends.

Dr Reddy’s is their top pharma pick because of its focus on execution of its complex generic strategy in the US, investments in R&D for future growth and bio-similar opportunity in Russia in the medium-term.

While analysts are expecting Dr Reddy’s profit growth to double to 20% in FY16 (from estimated 10% in FY10), the average target price of 20 analysts (18 buy/accumulate and two having hold rating) polled by Bloomberg since August stands at Rs 3,256.


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