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Spark Capital: Dr. Reddy's Laboratories – Q3 FY14 results review – US generics drive strong quarter; maintain ‘Buy’




Spark Capital Advisors(India) Private Limited


13 Feb 2014





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US generics drive strong quarter; maintain ‘Buy’ Strong performance of US generics segment drove PAT growth of 57% yoy for Dr Reddy’s in Q3FY14. However, key segments ex US – India (5% yoy), Russia (6% yoy in constant currency) – witnessed a muted quarter. PSAI remains a concern with revenues declining 29% and 16% yoy in Q3FY14 and 9MFY14, respectively. We expect growth to moderate for the company’s US business in FY15 given the high base of FY14 and management guidance of no big ticket launches. However, updates from Copaxone filing (filed ~2 years back, patent expiry in May 2014), filings from Octoplus and biosimilar trials (EU trials started for first biosimilar) will be key triggers for the stock over the next 12 months. Maintain ‘Buy’ rating with a target price of Rs. 3,000 (18x FY16E EPS) Takeaways from post-results conference call: Revenues from US segment grew 51% yoy (at constant currency) driven by limited competition products such as azacitidine, decitabine, divalproex ER, donepezil, zoledronic acid and increase in market share of key products namely metoprolol succinate ER, atorvastatin During the quarter, the company filed 2 ANDAs taking the total ANDAs pending approval to 62 (38 are Para IVs and 8 have FTF status). Management also guided for the first product from Octoplus to be launched ~5 quarters from now. Management remains confident about its ANDA filing for generic Copaxone (filed ~2 years back) India segment experienced muted growth of 5% yoy on account of pricing pressures under the DPCO policy Revenues from the PSAI segment declined 29% yoy on the back of subdued demand from customers and lack of new launches. Management sees improving order book and new launches going forward. During the quarter, the company filed 19 DMFs globally, including 6 in Europe bringing the cumulative number to 612 as of Dec 2013 Revenues from Russia grew by 6% (CER) despite a flat overall market. Growth was driven primarily by the OTC segment which now constitutes ~37% of the Russian portfolio. Company launched ~5 products in FY14 R&D expense for the quarter was Rs. 3bn (8.4% of revenues vs. 7.1% of revenues in Q3FY13). Management guided for R&D expense upwards of 9% of revenues going forward Capex for the quarter was Rs. 2.4bn. Management guided for capex of Rs.10bn in FY15 Tax rate for the quarter was 31% (vs. 19% in Q3FY13). Management guided for effective tax rate of ~22% for FY14

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