Dr Reddy's Labs looks to recover from Q1 blues with multiple growth drivers

Dr Reddy’s lower-than-expected performance for the June quarter and delay in key product launches led to weakness in the stock, which shed 3.4 per cent on Tuesday. Disappointment with June quarter performance was led by temporary disruption in active pharmaceutical ingredient (API) manufacturing and one-off inventory adjustments.

The management, however, guided for a strong comeback of pharmaceutical services and active ingredient sales in the September quarter, on the back of a healthy order book and resolution of certain product-related issues in an API plant. Inventory adjustments are also not a matter of worry, according to analysts. The company in anticipation of some product launches manufactures drugs which are adjusted if there are delays.

The positive is a tighter control on overhead costs (employee and selling, general and administrative expenses), with its ongoing programme of rationalised assets, products, and global presence, say analysts.

The company continues to rationalise its product portfolio, sell loss-making proprietary products, while concentrating on niche and limited competition products in the US. The US growth recovery remains on track and even though 3 per cent year-on-year (YoY) growth in North American sales was largely on a high base, the 9 per cent sequential growth is impressive.

The global generic sales grew 8 per cent YoY and 9 per cent sequentially, led by India and emerging markets growth — each contributing about a fifth to the overall revenue. Domestic growth of 15 per cent YoY (ahead of Industry growth) was driven by volume traction and improved realisations in base business and new product launches (eight brands). The higher focus of the company on the domestic market bodes well, as a stable growth environment fetches higher valuations. 

The company is also eyeing growth in China where it has ramped up its operations. Analysts expect some new launches by the end of the financial year. Meanwhile, European market growth of 19 per cent YoY is attributed to a resolution of supply issues from the Bachupally plant in Andhra Pradesh.

Some disappointment for the Street is due to a possible delay in key drug launches such as that of the generic version of the contraceptive NuvaRing, which may get extended to 2020-21 (FY21). The company expects additional queries from the US Food and Drug Administration.

The launch of the generic form of Copaxone (oncology product), too, is likely to be in FY21, feel analysts. The Street is keeping a close watch on these mega product launches and any delays could be a negative. Nevertheless, analysts remain positive on the US growth prospects.

The launch momentum has increased and is likely to continue through 2019-20 (FY20), say analysts at Nomura, who expect contribution from new products and increase in volumes to partly offset the price erosion, coupled with the adverse foreign exchange movement.

The company has guided for more than 30 product launches in FY20, which will be amongst the highest by an Indian company. Some of the interesting low-competition products launched so far include antibiotics Daptomycin and Tobramycin, Vitamin K, and over-the-counter calcium carbonate, along with hormone testosterone gel and relaunch of acne treatment drug Isotretinoin.

While acknowledging concerns around NuvaRing delay, analysts at Antique Stock Broking believe Dr Reddy’s portfolio of generic injectables (Daptomycin, pulmonary hypertension treatment Remodulin in the near-term, and Copaxone in FY21) are likely to be more than $25 million opportunities each. Other small products also have no competition and hence, can become a steady revenue stream with revenue potential in excess of $10 million annually, say analysts.

Most analysts thereby remain positive on the company’s earnings growth. Nomura, Prabhudas Lilladher, and Antique Stock Broking see 17-28 per cent upside for the stock, from the current levels.  

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