Dr Reddys Labs: PINC Research Report

PINC Research has recommended HOLD rating on Dr Reddys Labs (DRL) with a target of Rs 1567 on the following investment rationale:

Dr Reddys Labs has one of the exciting product pipelines in the US for the next two years and could now see approval for its key products flowing from Q2FY12. Dr Reddys Labs is also confident on strong growth in India and Russia segments. We valueDr Reddys Labs on a SOTP basis with a target price of Rs1,567, valuing the base business at Rs1,501 (20x Sept’12 recurring earnings) and Rs66/share for P-IV/ limited competition opportunities.

Dr Reddys Labs has launched the private label of base Allegra in April 2011 and is seeing a good traction but overall market size post the OTC shift could have reduced by 25- 30% to USD150-200mn. However on the positive front the number of players in the market has reduced. Dr Reddys Labs expects the approval for the private label Allegra D-24 (fexo-Pseudo) by Q2FY2012. Allegra D-24 is a narcotic based drug and would be available behind the counter. We expect Q1FY12 to see marginal negative impact on the revenue front on back of the shift of base Allegra from generic to the OTC segment. Further, Perrigo (Teva supplier) have also launched the private-label of base Allegra in April 2011 and is confident of majority of the business in spite of strong competiton from Dr Reddys Labs.

Dr Reddys Labs has replied to US FDA queries in March 2011 and has not heard any thing from the regulator till date. As per Dr Reddys Labs the complexity of the product has caused the delay. In spite of product acceptance under GIVE programme by US FDA in May 2009 it has been >20months pending approval. We now expect the regulator to take normal ANDA approval time-line of around 30 months and expect the approval by Q3FY12. Launch of any authorised generic by the innovator would be a dampener. Dr Reddys Labs has 180-days exclusivity on the 20mg strength and expects the approval in Q2FY12. Post the exclusivity period Dr Reddys Labs expects strong competition to kick-in. The market size of the product is around USD800mn.

While Dr Reddys Labs has one of the exciting product pipelines in US for next two years and could now see its key product approvals flowing from Q2FY12. Dr Reddys Labs is also confident on strong growth in India and Russia segments. Dr Reddys Labs‘s stock has corrected by 4% in last one month and underperformed the BSE HC index by 7% on back of DEPB withdrawal issue and delay in key product approvals. Dr Reddys Labs‘s stock is currently trading at 22.2x FY12 and 18.2x FY13 recurring earnings. We have revised our estimates downwards marginally to factor in delay in key product approvals and increasing R&D spend. We value Dr Reddys Labs on a SOTP basis with a target price of Rs1,567, valuing the base business at Rs 1,501 (20x Sept’12 recurring earnings) and Rs 66/share for P-IV/ limited competition opportunities. We maintain ‘HOLD’ on the stock of Dr Reddys Labs.