Focus on India, emerging markets could drive Dr Reddy's rerating

Dr Reddy’s has gained about 10 per cent from February lows on expectations that some recovery in the US market and its emerging markets (EMs) focus should improve its growth trajectory.

The company’s performance during the December quarter showed some green shoots, with a 4 per cent sequential growth in the US. 

Analysts believe its US generics business might be finally turning the corner. A few approvals for launches and positive developments on opioid drug Suboxone litigation also bode well, while some relief on regulatory front provides more confidence. The clearance of Duvvada facility by the US drug regulator was a key positive.

The company thereafter has been able to get its Hyderabad facility cleared without any 483 observations. Analysts say that the news flow has provided some respite from regulatory worries, even as two more Indian facilities are still under the US’ scanner.

The Duvvada facility accounts for almost 20 of the total 100 products in the company’s pipeline, of which half are injectables (and some niche drugs). The Street is also expecting operating margins to improve over FY19-21 due to key launches in the US (generics of Suboxone, contraceptive NuvaRing, multiple sclerosis drug Copaxone in the next 18 months), control on overheads, and reduction in the regulatory spend.

Meanwhile analysts at the CLSA say that the company can see potential rerating if its strategy to focus on India and other EMs pays off. The company will continue to invest in complex generics in the US, but focus on reducing losses in proprietary products segment and being selective in biosimilar launches. 

Analysts say while results of the initiatives may take time to accrue, stable markets like India and EMs will get a higher valuation compared to the US. With many of its products in the US meeting China’s regulatory requirements, Dr Reddy’s is best placed to leverage the China opportunity.

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