Dr. Reddy’s Shares Fall Even As Analysts Bet On New Growth Drivers, Launches
Here’s what analysts have to say about Dr. Reddy’s.
Analysts bet on Dr. Reddy’s Laboratories Ltd. citing new product launches, growth in core business and increase in sales in China, Brazil and Europe.
The drugmaker plans to scale up its existing business—that it defines as core or ‘Horizon 1’, saying it would help to deliver growth in the short to medium term. Among new opportunities or ‘Horizon 2’ should be short- to- long-term growth drivers for the company, the analysts said in their research reports after the investor meeting on June 21.
Dr. Reddy’s aims to be among the top five drumakers by market share in India. In China, it plans to increase sales 2-3x in the next five years, and in Brazil, it aims for a sales jump of 4-5x in five years, they said.
Shares of the company fell as much as 2.5% intraday but are currently trading 1.9% down as of 11:10 a.m. on Wednesday compared with a 0.98% decline in the benchmark Sensex.
Of the 43 analysts tracking the drugmaker, 38 maintain a ‘buy’ and five suggest a ‘hold’, according to Bloomberg data. The average of the 12-month target prices implies an upside of 18.5%.
Here’s what brokerages have to say about Dr. Reddy’s:
Morgan Stanley
Recommends ‘overweight’ with a target price of Rs 5,099 apiece, implying an upside of 19%.
The company expects double-digit sales growth to continue in the near term, driven by its core business.
It reiterated 25% Ebitda and 25% return on capital employed guidance, driven by operating leverage and productivity gains.
This would be driven by growing its core business (Horizon 1)—generics, branded generics, OTC, API, biosimilars—and building the future levers (Horizon 2)—immuno onco new chemical entities, biologics and competitive generic therapy, disease management nutraceuticals, direct-to-consumer, contract development and manufacturing and digital services.
Future businesses could potentially contribute 15% of total sales by 2027.
Dr. Reddy’s plans to launch 20-25 products in FY23.
Pipeline of complex generics including semaglutide (diabetes), teriparatide (osteoporosis), octreotide (diarrhea), liraglutide (diabetes), regadenoson (stress agent) and dasatinib (cancer); and biosimilars—pegfil (stimulates production of healthy white blood cells), gRituxan (2023 filing) (used to treat autoimmune diseases and types of cancer), tocilizumab (arthritis) and abatacept (autoimmune diseases like rheumatoid arthritis).
Productivity improvement to be driven by—integrated product strategy (global market alignment to drive seamless execution); first-to-market launches, aided by technology-led process integration; competitive cost (continuous life-cycle management, alternate vendor development, economies of scale); infrastructure alignment; and improvements through 4.0 technology.
Gross processing margin could increase 500 basis points in five years if 70% of core API molecules are backward integrated.
It aims to be among top five in market share in India.
For China, it is filing 13-14 products per annum from its owned as well as partnered portfolio. 25-30% market share per product is likely if it enters the first GPO (group purchasing organisation) list.
Near-term challenges are inflation, demand volatility, continued price erosion and geopolitical uncertainties.
New sterile plant (FTO 11) inspection will be in H1 (first half) July 2022.
Risks to upside: Ramp up of gVascepa (reduce cardiovascular risk), earlier-than-expected approval and launch of gCopaxone (multiple sclerosi), gRevlimid (blood cancer) monetisation, faster growth in Russia and emerging markets, biosimilar and injectable monetisation.
Risks to downside: Loss of and/or delays in niche product opportunities, higher competitive intensity for key products in the U.S., more challenging FDA situation
Jefferies
Recommends ‘buy’ with a target price of Rs 5,036 apiece, implying an upside of 18% from Tuesday’s closing price.
Dr. Reddy’s reiterated its 25%/25% Ebitda/ROCE targets.
It aims for sustainable double-digit top line growth, and plans to expand existing business and seek new opportunities such as biologics, CDMO and CGT.
Dr. Reddy’s also highlighted its U.S. pipeline and said it would work toward building a more backward-integrated company.
It plans to scale up its existing business (it defines this as core/ Horizon 1) , which it says will help to deliver growth in the short to medium terms.
Among new opportunities/Horizon 2 should be short- to long-term growth drivers for the company.
Dr. Reddy’s has identified three pillars to achieves its target—leadership in chosen spaces (economy of scale, complex, brands and clinically differentiated products); productivity (digitisation and automation, operational and commercial excellence, continuous improvement); and innovation (patient-focused breakthrough, unmet needs and user delight, horizon 1 and horizon 2).
U.S.: Dr. Reddy’s U.S. portfolio consists of over 335 products, of which more than 160 are commercial and the rest are in various stages of development. 90 products have been filed and the rest will be filed in the coming years.
Europe: Dr. Reddy’s plans to build scale in EU5—Germany, the U.K., Spain, France, and Italy; selective geographical expansion; and launch more first-to-files.
India: Dr. Reddy’s aims to be in top five in the market, and already sits in the top 10 from a rank of 16. Horizon 1 area for the geography is building big brands. Horizon 2 will be nutraceuticals OTC,
Biologics and CART-T (chimeric antigen receptor T cells are genetically engineered to produce an artificial T cell receptor for use in immunotherapy), new chemical entities/ new biological entities; conditional and disease management.
Emerging markets: In China, Dr. Reddy’s aims to increase sales 2-3x in the next five years, and in Brazil it aims for a sales jump of 4-5x in five years and grow oncology and institutional.
Investment thesis: Revlimid settled to launch in FY23, injectable portfolio launch in the U.S. in FY23.
Motilal Oswal
Maintains ‘buy’ with a target price of Rs 4,950 apiece, implying an upside of 16%.
Positive on Dr. Reddy’s on the back on niche launches in the U.S. generics, leveraging its portfolio at global level, increasing backward integration as well as controlled cost.
The company indicated medium-term aspiration to achieve double-digit sales growth and 25% Ebitda margin.
It expects to enhance value for all the stake holders through increasing business prospects in existing segments under ‘Horizon-1’ strategy and adding new business models under ‘Horizon-2’ strategy. This would also be supported with inorganic moves, if required.
The company has been able to achieve the CAGR of 5% in the U.S. over FY19-22 despite price erosion in the U.S. on the back of market share gain in certain products like gSuboxone (opioid treatment), g-Vascepa, Dexamethasone (swelling, asthma, arthritis), Metoprolol ER (chest pain, heart failure), and Liposomal Doxorubicin (chemotherapy).
Dr. Reddy’s intends to sustain the growth momentum in Europe by adding branded generics, pharmaceutical cannabis and adding biosimilars to existing portfolio.
It intends to grow its business in China to 2-3x its existing sales over next three to five years. This would be supported by double-digit filings on annual basis over next three to five years.
It also aims to improve its business in Brazil to 4-5x over next five years by adding more levers of growth in oncology and institutional space.
The company aims to backward integrate 70% of the core molecules which is expected to result in 500 bps expansion in gross margin (from 52.6% in FY22) over the next five years.
It aims to expand its institutional and B2B value add offerings apart from API in more than 60 countries in next five years from 25 countries currently.
Current biosimilars business pipeline comprise 12 products with one filed. By FY23, Dr. Reddy’s expects two assets to enter clinical phase and further scale-up of two other assets.
It is in advanced stage of review with the U.S. FDA for its Pegfilgrastim.
The company expects to file biosimilar Retuximab by early CY23.
Maintains ‘buy’ based on its limited-competition product pipeline in the U.S. market, strong core therapies in domestic formulations, and the stock’s attractive valuation.
CLSA
Maintains ‘buy’ with a target price of Rs 4,950 apiece, implying an upside of 16%.
The company reiterated its medium-term aspirations of double-digit sales growth and 25% Ebidta/ROCE target despite investing in its future.
It expects to invest 0.5-1% (Rs 200-300 crore) in new initiatives which should see meaningful contribution from 2027.
North America has a pipeline of over 175 products of which 90+ have been filed.
Its presence in Europe will expand beyond Germany in the medium term.
The launch of differentiated formulations, its nutrition portfolio, and biologics and innovative products should support growth in Russia, China (significant scale-up in filings) and Brazil which were identified as key markets within emerging markets.
Management alluded to research and development investment as a proportion to total R&D would increase and that it plans to set up marketing infrastructure in the U.S. to commercialise future products.
It also plans to add two to three assets every three-four years. It also plans to invest in CDMO biologics and cell and gene therapies.
