Note: All new or revised material since the last update is highlighted.
Reason for Report: News Update
Prev. Ed.: Feb 15, 2018:3QFY18 Earnings Update
Brokers’ Recommendations: Negative: 100.0% (1 firm); Positive: 0.0% (0); Neutral: 0.00% (0) Prev: 1; 0; 0
Brokers’ Target Price: $40.25 (↔as the last edition; 1 firm) Brokers’ Avg. Expected Return: 15.9%
Portfolio Manager Executive Summary
Dr. Reddy’s Laboratories is a global pharmaceutical company,which primarily focuses on the U.S., European, Russian and Indian markets. Finished dosage, active pharmaceutical ingredients (API), and both branded as well as generic pharmaceutical products account for the bulk of Dr. Reddy's revenues.
Just one firm covering Dr. Reddy’srendered a negativerating on the stock. No firm has a positive or neutral rating forthe stock.
Negative outlook (1/1 firm):Thoughthe company reported better-than-expected revenues and margins in 3QFY18, the outperformance was led entirely by milestone payment of $20.4 million (INR 1.3 billion). The company invested heavily in its generic and specialty pipeline, the benefits of which are due to be realized in a few months’time. Despite this, the firmremains concerned about facility quality issues. Therefore, the key priority for management now is investing in these facilities to upgrade to global standards. Though this might take a few quarters, the firm remains bearish on the stock.
Feb 15, 2018
Overview
Based in Hyderabad, India, Dr. Reddy’s Laboratories Ltd. is engagedin the development, manufacture and marketing of pharmaceutical products. The company develops finished dosage forms, active pharmaceutical ingredients, diagnostic kits, critical care products and biotechnology products. It also conducts research in the areas of metabolic disorders, cardiovascular diseases and bacterial infections. Dr. Reddy’s has a worldwide market for its products including India, China, the U.S., Russia and several European countries.
Dr. Reddy’s operates in three segments – Global Generics, Pharmaceutical Services & Active Ingredients (PSAI) and Proprietary Products and Others. The Global Generics businesses include branded and unbranded prescription and over-the-counter (OTC) pharmaceutical products, while PSAI consists of Active Pharmaceutical Ingredients (API) and Custom Pharmaceuticals Services (CPS). TheProprietary Products include biosimilars, differentiated formulations and new chemical entities (NCEs).
Dr. Reddy’s has a collaboration agreement with Merck Serono to co-develop a portfolio of biosimilar compounds in oncology, primarily focused on monoclonal antibodies (MAbs). Moreover, the company has a strategic partnership with Glaxo to market selected products across emerging markets outside India.
The company’s website is:
Oct 24, 2016
The firms have identified the following issues for evaluating the investment merits of Dr. Reddy’s:
Key Positive Arguments / Key Negative ArgumentsEfforts to step up Abbreviated New Drug Application (ANDA) filings and focus on partnerships in overseas markets are expected to help build goodwill for the company. / With several large branded drugs due to lose patent exclusivity within 2017–2018, there is little visibility on the growth prospects of generic companies like Dr. Reddy’s beyond that timeframe. Moreover, lower number of approvals will hamper business growth in the U.S.
Dr. Reddy’s is working with Merck Serono to develop and commercialize a portfolio of biosimilar compounds in oncology, primarily focused on MAbs. Dr. Reddy’s has already expanded its biosimilars facility in India to meet growing demand in the emerging markets.
The sales in emerging markets, Russia, other CIS countries and Romania and Rest of World (RoW) territories all recorded a decline, reflecting constrained operations in Venezuela and the depreciation of the ruble
Note: The company’s fiscal year ends on Mar 31.
Feb 15, 2018
016
Long-Term Growth
Dr. Reddy’sintends on improving profitability over the next few years. Growth is likely to be driven by strategic expansion of generic markets, contribution from low-competition opportunities in the United States, restructuring of German operations, rampup in the biologics business and double-digit growth in the emerging markets.The company expects future growth opportunities on the back of new product launches in the Global Generics and revival of the PSAI segment. The company has a strong market forover-the-counter (OTC) products in Russia and has plans to further improve revenues by continuous branding initiatives.
Dr. Reddy’s focus on developing a limited competition generic product portfolio in the United States is paying off well with these products generating substantial revenues. The company has launched high-value and limited competition assets including the generic version of Exelon patch, Lyrica and Abilify. The company is working on expanding this portfolio which should boost future revenues as well.
Meanwhile, the company continues to work on expanding its biosimilars portfolio, which should drive growth in the long run. Dr. Reddy’s collaboration agreement with Merck Serono, the biopharmaceutical business of Merck KGaA, for the development and commercialization of biosimilar compounds in oncology should help drive long-term growth. Dr. Reddy’s has already expanded its biosimilars facility in India to meet growing demand in emerging markets. The company launched four biosimilars in India, namely, rituximab (brand name: Reditux), filgrastim (brand name: Grafeel), darbepoetin alpha (brand name: Cresp) and peg-filgrastim (brand name: Peg-Grafeel).
Also, the company’s deal with GlaxoSmithKline for manufacturing and developing products in the emerging markets should boost revenues.
Additionally, Dr. Reddy’s is making efforts to select and develop precision targets in the field of immuno-oncology. The collaboration between Dr. Reddy’s wholly owned subsidiary, Aurigene and Curis, Inc.should augment these efforts.Such initiatives should help offset the impact of delay in new product approvals and price erosion.
Feb 15, 2018
Target Price/Valuation
Rating DistributionPositive / 0.00%
Neutral / 0.0%
Negative / 100.0%
Avg. Target Price / $40.25
High / $49.00
Low / $32.00
No. of Analysts with Target price/Total / 1/1
Recent News
Dr. Reddy's (RDY) Q3 Earnings Fall, Revenues Improve Y/Y — Jan 25, 2018
Dr. Reddy's reported 3QFY18 earnings per American Depositary Share of 32 cents, down 27.3% from 44 cents earned in the year-ago quarter. However, earnings include a one-time charge of $14.6 million (INR 930 million) due to recent tax law change in the United States. Adjusting for this item, earnings came in at 41 cents per share.
However, revenues increased 2.6% y/y to $596 million.
Quarter in Detail
Dr. Reddy’s reported revenues under three segments — Global Generics, Pharmaceutical Services & Active Ingredients (“PSAI”), and Proprietary Products and Others.
Global Generics revenues fell about 2% year over year to $472 million during the third quarter. The decline was attributed to adverse foreign exchange as the US dollar depreciated by about 4% and lower contribution from Europe generics market. On a sequential basis, the segment registered 5% growth driven by the United States and Emerging Markets.
PSAI revenues were $85 million, up 1% y/y.
Revenues at the Proprietary Products and Others segment came in at $39 million, up 145% from the year-ago quarter.
Revenue
Revenues increased 2.6% y/y to $596 million in 3QFY18.
Global Generics
The segment focuses on manufacturing and marketing prescription and over-the-counter finished pharmaceutical products that are ready for consumption. It comprises theBranded Formulations and Generics business.
Global Generics revenues fell about 2% y/y to $472 million during 3QFY18. The decline was attributed to adverse foreign exchange as the US dollar depreciated by about 4% and lower contribution from Europe generics market. On a sequential basis, the segment registered 5% growth driven by the United States and Emerging Markets.
The following is a detailed summary of revenues from Global Generics:
Revenues from North America declined 3% y/y mainly due to higher price erosions due to channel consolidation, increased competition in the key products namely and impact of adverse foreign exchange. This is partly offset by new products contribution.
As of Dec 31, 2017, Dr. Reddy has 102 generic filings (99 abbreviated New Drug Applications (ANDAs) and three new drug applications) that are pending for the FDA approval. Of these 99 ANDAs, 59 were Para IV filings and 29 have first-to-file status.
Revenues from Emerging Markets declined 1% y/y.
Revenues from India rose3% y/y. Normalizing for the GST transition related adjustments, the comparable growth is around 11%.
Revenues from Europe fell by 7% y/y in reporting currency due to higher price erosion in some of the key molecules along with temporary supply disruptions.
New Developments
On Apr 2, 2018, Dr. Reddy’s and its subsidiary, Promius Pharma, LLC announced the filing of new drug application (NDA) for its migraine candidate DFN-02 with the FDA.
On Mar 28, 2018, Dr. Reddy’s Laboratories launched Palonosetron Hydrochloride Injection, 0.25 mg (base)/ 5 mL, a therapeutic equivalent generic version of Aloxi (palonosetron hydrochloride) Injection approved by the U.S. Food and Drug Administration (USFDA). The Aloxi brand and generic had U.S. sales of approximately $446 million MAT for the most recent twelve months ending in January 2018 according to IMS Health.
On Mar 16, 2018, Dr. Reddy’s launched Levocetirizine Dihydrochloride Tablets USP, 5 mg, an over-the-counter therapeutic equivalent generic version of Xyzal Allergy 24HR Tablets in the United States market as approved by the FDA. The Xyzal Allergy 24HR Tablets brand had U.S. sales of approximately $71 million for the most recent twelve months ending in January 2018 according to IRI.
On Feb 2, 2018, Dr. Reddy’s launched Tetrabenazine Tablets, a therapeutic equivalent generic version of Xenazine (tetrabenazine) in the United States market approved by the FDA. The Xenazine brand and generic had U.S. sales of approximately $322 million MAT for the most recent twelve months ending in November 2017 according to IMS Health.
On Dec 26, 2017, Dr. Reddy’s launched Melphalan Hydrochloride for Injection, a therapeutic equivalent generic version of Alkeran (melphalan hydrochloride) for Injection in the United States market approved by the FDA. The Alkeran brand and generic had U.S. sales of approximately $107 million MAT for the most recent 12 months ending in October 2017 according to IMS Health.
On Dec 1, 2017, Dr. Reddy’s through its wholly-owned subsidiary Promius Pharma, LLC, announced its fifth consecutive, first cycle new drug application (NDA) approval for the Proprietary Products Group, a substantial milestone within the pharmaceutical industry. Impoyz (clobetasol propionate) Cream, 0.025% is a high potency topical steroid approved for the treatment of moderate to severe plaque psoriasis in patients 18 years of age or older.
On Nov 14, 2017, Dr. Reddy’s announced that it has launched clofarabine injection, a therapeutic equivalent generic version of Clolar (clofarabine) Injection in the United States, approved by the FDA. The Clolar brand and generic had U.S. sales of about $53 million MAT for the most recent twelve months (ended in September 2017), according to IMS Health.
On Nov 2, 2017, Dr. Reddy’s announced that generic Azacitidine for injection 100 mg/vial — a bioequivalent generic version of Vidaza (azacitidine for injection) — is approved by Health Canada. Dr. Reddy’s is first to market Azacitidine for injection in Canada.
On Sep 29, 2017, Dr. Reddy’s announced that it has launched Sevelamer Carbonate Tablets, 800 mg, a therapeutic equivalent generic version of Renvela (sevelamer carbonate) Tablets, approved by the FDA.
On Sep 6, 2017, Dr. Reddy’s announced that it has launched Metaxalone Tablets, USP 800 mg, a therapeutic equivalent generic version of Skelaxin (metaxalone) Tablets, approved by the FDA. The Skelaxin brand and generic had U.S. sales of approximately $139 million MAT for the most recent twelve months ending in July 2017 according to IMS Health.
On Sep 6, 2017, Dr. Reddy’s announced that it has launched Bupropion Hydrochloride Extended-Release Tablets, USP (XL), 150 mg and 300 mg, a therapeutic equivalent generic version of Wellbutrin XL (Bupropion Hydrochloride Extended-Release) Tablets, approved by the FDA. The Wellbutrin XL brand and generic had U.S. sales of approximately $754 million MAT for the most recent twelve months ending in July 2017according to IMS Health.
On Aug 28, 2017, Dr. Reddy’s announced that it has launched Cefixime for oral suspension,USP100 mg/5mL and 200 mg/5mL, a therapeutic equivalent generic version of Suprax (cefixime) for oral suspension, approved by the FDA. Per IMS Health, the Suprax brand and generic had U.S. sales of approximately $50.5 million MAT for the most recent 12 months ending in June2017.
Pharmaceutical Services and Active Ingredients (PSAI)
This segment focuses on manufacturing and marketing active pharmaceutical ingredients (API) and intermediates, which are the principal ingredients for finished pharmaceutical products.
PSAI revenues were $85 million in 3QFY18 leading to an upside of 1% y/y.
Proprietary Products and Others
The Proprietary Products segment consists of the differentiated formulations business, the new chemical entities business, and the dermatology business operated through Promius Pharma.
Revenues at the Proprietary Products and Others segment came in at $39 million in 3QFY18, up 145% from the year-ago quarter.
The company’s first-cycle NDA approval of high potency topical steroid Impoyz for the treatment of moderate to severe plaque psoriasis in patients 18 years of age or older is a significant milestone in the commercialization of its proprietary products pipeline. In line with the existing out licensing agreement with Encore Dermatology Inc. this approval triggered milestone recognition of $20.4 million (INR1.3 billion) during 3QFY18.
Approvals
Sernivo (DFD-01)
Indication: For treatment of moderate plaque psoriasis.
Stage of development: Launched in 2016.
Zembrace (DFN-11)
Indication: Acute treatment of migraine with or without aura in adults.
Stage of development: Launched in 2016.
Pipeline Candidates
DFD-06
Indication: For treatment of moderate psoriasis affecting up to 20% of the body surface area in patients of 18 years of age or older.
Stage of development: Phase III
DFN-02
Indication: For treatment of migraines, with or without aura
Stage of development: Phase III
The company has completed pivotal bioequivalence studies and is conducting patient safety study on the candidate. The company expects to file for the new drug application (NDA) in 2018.
DFD-09
Indication: Treatment of only inflammatory lesions (papules and pustules) of rosacea in adult patients.
Stage of development: Filed for approval in the U.S.
Alliances, Agreements, and Collaborations
On Aug 28, 2017, Dr. Reddy’s launched a United States’ marketing campaign to reintroduce back pain–reliever Doan’s, available in caplets and a new 4% lidocaine plus menthol cream formulation (the maximum strength of lidocaine available without prescription). With thetagline “we’ve had your back’s back since way back,” the campaign brings a fresh approach to Doan’sfirst marketing efforts in a generation. Dr. Reddy’s Laboratories acquired Doan’s and several other over-the-counter products from Ducere Pharma in 2016.
On Aug 22, 2017, Dr. Reddy’s through its wholly owned subsidiary Promius Pharma, LLC announced that it has out-licensed the future development, manufacturing, and commercialization rights of DFD-06, a topical high potency steroid, to Encore Dermatology Inc. The drug is intended to be used for treatment of moderate to severe plaque psoriasis.
Per the agreement, Encore will be responsible for the commercialization of DFD-06 in the United States. Promius Pharma is eligible to receive certain pre-and post-commercialization milestone payments of up to $32.5 million, followed by fixed royalty payments on net sales.
On Jul 27, 2017, Dr Reddy’s and CHD Bioscience Inc., a privately held biopharmaceutical company announced a global licensing agreement for the clinical development and commercialization of Dr. Reddy’s phase III clinical trial candidate, DFA-02. The drug is intended to be used for the prevention of surgical site infections, following non-emergency, elective colorectal surgery. Phase II studies for DFA-02 have been successfully completed, and the product will be transitioning to pivotal phase III registration studies.
Under the terms of the agreement, Dr. Reddy’s would receive equity in CHD valued at $30 million upon an IPO of CHD or a minimum of $30 million in cash within 18 months of execution of the agreement. In addition, the company receive additional milestone payments of $40 million upon USFDA approval. Also, CHD will pay Dr. Reddy’s double-digit royalties on sales and commercial milestones.
Margins
The company reported gross margin of 56.3% in 3QFY18. The gross profitreflects a y/ydecrease of 280basis points (bps) due to higher price erosions due to channel consolidation and increased competitive intensity in some of its key molecules in the United States and adverse foreign exchange impact. The Global Generics and PSAI segments recorded gross margins of 59.5% and 23.8%, respectively, in 3QFY18.The gross margin however, improved by about 300 bps sequentially, aided by better product mix and milestone receipt of INR1.3 billion in Proprietary Products.
In 3QFY18, research and development expenses were down 6% y/y to $73 million. The company remains focused to build a sustainable revenue stream through a mix of simple and complex generics, biosimilars and differentiated products pipeline.
Also, selling, general and administrative expenses were $189 million, up 6% y/y in 3QFY18.
s
Earnings per ADS
Dr. Reddy's reported 3QFY18 earnings per American Depositary Share of 32 cents, down 27.3% from 44 cents earned in the year-ago quarter. However, earnings include a one-time charge of $14.6 million (INR 930 million) due to recent tax law change in the United States. Adjusting for this item, earnings came in at 41 cents per share.
Others
On Mar 29, 2018, Dr. Reddy’s announced a change in the makeup of its senior leadership team. Following a 15-year career with the company, Mr. Abhijit Mukherjee, Chief Operating Officer, will retire on Mar 31, 2018. Mr. Mukherjee will be succeeded by Mr. Erez Israeli, former President & CEO of Enzymotec. Mr. Israeli will join Dr. Reddy’s on April 2, 2018, as Chief Operating Officer and Global Head of Generics & PSAI, based out of Hyderabad. He will report to Dr. Reddy’s Co-Chairman & CEO, G.V. Prasad.