QUOTE AND NEWS
The Economic Times  Sep 19  Comment 
Incidentally from the midcap pharma space, Dishman Pharma is what we are liking. The stock has disappointed in terms of EBITDA margins in the quarter gone by.
The Economic Times  Sep 18  Comment 
'Dr. Reddy is a 'Buy' call with a target of 3180 and stop loss of 3090. '
The Hindu Business Line  Sep 17  Comment 
Hero MotoCorp was on a roll on the bourses in the afternoon session on Wednesday. At 2.29 pm the stock was the top gainer on the NSE as well, quoting at ₹2,870.05 as against ₹2,790.50 at close yes...
The Economic Times  Sep 17  Comment 
"Dr Reddy's Laboratories Ltd is a 'BUY' call with a target of Rs 3060 and a stop loss of Rs 2990."
The Hindu Business Line  Sep 16  Comment 
Extending yesterday’s firm trend on the bourses, pharma stocks were predominant gainers on the BSE on Tuesday as well. Dr Reddy's and Sun Pharma traded firm but were off their morning highs in lat...
The Hindu Business Line  Sep 11  Comment 
Teams plan and carry out daily activities in manufacturing, packing and so on
The Economic Times  Sep 1  Comment 
"Dr Reddy's Laboratories Ltd is a 'BUY' call with a target of Rs 3050 and a stop loss of Rs 2930."
The Economic Times  Aug 27  Comment 
"Dr Reddy’s is a 'BUY' call with a target of Rs 2970 and a stop loss of Rs 2908."
Reuters  Aug 21  Comment 
Export-focused drugmaker Dr. Reddy's Laboratories Ltd said it was in talks with a U.S. regulator over allegations it violated packaging rules for some prescription drugs sold there between 2008 and 2012.
The Economic Times  Aug 21  Comment 
Over the next two years it should witness an 18% CAGR on its top line and the EPS should be anywhere around Rs 170-172 from an FY16 perspective.




 

Dr. Reddy's Laboratories (RDY) is the number one pharmaceutical company in India in terms of profitability.[1] It's consolidated revenues decreased by 23% to Rs. 50,006 million in 2007–08 from Rs. 65,095 million in 2006–07.[2] The reasons being, first, no major US generics launch in 2007-08 as compared to 2006–07, when its generic sales were around $750 million overall, more than half of its total revenues due to launch of Simvastatin and Finasteride, the generic versions of Zocor and Proscar respectively of Merck.[3] Second, pricing pressures in the German generics market as well as supply chain problems with betapharm’s, Dr.Reddy's German subsidiary, contract manufacturer, Salutas.[3] Third, the company’s Custom Pharmaceutical Services (CPS) business out of Mexico was also hindered by supply chain constraints in the beginning of 2007–08.[3] However, both these supply chain constraints were subsequently resolved by migrating the manufacturing base to Dr. Reddy’s facility in India. And fourth, weakening of the US dollar vis-à-vis the rupee.[3] In 2007-08 Dr.Reddy's invested a total of Rs. 6,293 million on creating new manufacturing and R&D capacities[4] making their generics manufacturing facilities one of the largest in Asia.[4] Dr. Reddy's is also pursuing growth in the relatively untapped biogenerics market. At the beginning of 2008, the company already produced and sold 2 different biogenerics in India and had plans to add one drug per year over the next 8 years.[5]

Dr. Reddy's is a major seller in Europe, the US & Canada, and is a dominant player in Russian and Indian markets where it has faced limited competition in the past. Going forward however, the company will face greater competition from companies like Mylan and Barr Pharmaceuticals (BRL) which have made acquisitions in recent years (2006/2007) that have expanded their presence in international markets.

Business Overview

Dr. Reddy's produces branded products to treat cancer, diabetes, cardiovascular disease, inflammation and bacterial infection, all major growth categories in terms of demand for medications. It also produces Active pharmaceutical ingredients (API)'s and intermediates and finished dosage forms and biologics products and markets them globally, with a focus on India, the United States, Europe and Russia.[6] The company is vertically integrated and uses many of the API's in its branded products. It conducts New Chemical Element drug discovery research in the areas of metabolic disorders and cardiovascular indications at it's research facilities in Atlanta (USA) and Hyderabad (India).[7] In 2007 it became one of the top 5 generic manufacturers by revenue.[8]

Business and Financial Metrics

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Dr.Reddy's Revenue and Net Profit[9]

In the quarter ended December 31 2008, the total revenue increased to Rs. 18.4 billion as against Rs. 12.3 billion in Q3 FY2008 reporting an increase of 49%.[10] The increase is mainly due to the launch of the authorized generic version of GlaxoSmithKline’s migraine drug Imitrex in November 2008[10], RDY being the only generic manufacturer of the drug in U.S.[11]

From FY2007 to FY2008, the total revenue decreased from Rs 65,095.1 Mn to Rs 50,005.6 Mn by 23.18% and net profit also showed a decline of 49.84% from Rs 9326.8 Mn to Rs 4,678 Mn.[9] The decline in the net profit was greater than that in total revenue due to an increase of 43% in the research and development cost from Rs. 2,463 million in 2006–07 to Rs. 3,533 million in 2007–08.[12] From FY2005 to FY2007, the total revenue grew from Rs 19,519.4 Mn to Rs 65,095.1 Mn, at average annual rate of over 190%.[9] The net profit for the same period grew from Rs 211.2 Mn to Rs 9,326.8 Mn, at average annual rate of over 650%.[9]

Share holding pattern: Dr Anji Reddy established Dr. Reddy's Laboratories in the year 1984 with an initial capital outlay of Rs.25 lakhs.[13] It went public and got listed on the Bombay Stock Exchange in August 1986[14] and on New York Stock Exchange in April 2011[15]

Dr.Reddys Labs share holding pattern [16]
Entity Percentage
Indian Promoters 26.40%
FII's 22.40%
General Public 10.14%
Banks Fin. Inst. and Insurance 13.54%
Private Corporate Bodies 3.00%
NRI's/OCB's/Foreign Others 1.87%
Others 15.91%

Business Segments

Formulations (30.5% Revenue)[17]

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Company Annual Reports[18]
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Company Annual Reports[19]

Dr.Reddy's derives its revenue from the sale of branded finished dosage forms primarily in India, Russia and other emerging markets.[20] It has four facilities for manufacture of formulation products in India, but it also uses third-party manufacturing facilities and even purchases some products from approved third parties based on the necessity and requirement of the market.[21] Primarily driven by increase in revenues from India, Russia, Romania, Venezuela, Vietnam and former CIS countries, revenues from this segment increased by 16.5% compared to year ended March 31, 2007.[22]

Active Pharmaceutical Ingredients and Intermediates Segment (23.6% Revenue)[17] Active pharmaceutical ingredients are the principal ingredients for finished dosages and Intermediates are the compounds from which active pharmaceutical ingredients are prepared.[23] Revenues from this segment were largely at the same level at Rs.11,804.8 million compared to Rs.11,883.0 million in the year ended in March 31, 2007.[22] Dr.Reddys produce and market more than 100 different active pharmaceutical ingredients and intermediates in several markets, principal ones being North America and Europe, which together contributed 40.8% of this segment’s revenues.[23]

Generics(35.6% Revenue)[17] As compared to the year ended March 31, 2007, revenues from this segment decreased by 46.5%. Revenues in the year ended March 31, 2007, included revenues from sale of authorized generics of Rs.15,812.8 million. Excluding authorized generics sales from both the years, revenues decreased by 9.2%.[22] Revenues from sales of generic products in North America decreased by 66.0% primarily due to a decrease in revenues from sales of fexofenadine, launched in April 2006, and ondansetron, launched in December 2006 (under 180 day exclusivity) caused largely by lower sales prices.[24]

Custom pharmaceutical services(9.6% Revenue)[17] Under this segment Dr.Reddys markets process development and manufacturing services to customers primarily consisting of innovator pharmaceutical and biotechnology companies.[25] Revenues in this segment decreased by 27.0% compared to the year ended March 31, 2007, primarily on account of a decrease in sales of their key products such as epoxide, naproxen and naproxen sodium.[22]

Key Trends and Forces

INR/USD Relationaship:


Around 57% of the company's sales are invoiced in US Dollars.[26] Therefore the value of the Indian rupee (INR) compared to the US dollar impacts the earnings of the company. Any appreciation in the value of the INR results in to lower margins, thereby resulting in lower share price and dividend payments. During the year the US dollar weakened by approximately 11 percent against the Indian rupee(INR).[26] As the Company has a major portion of its revenues in US dollars, it suffered on account of reduced rupee realizations. Although the Company takes foreign exchange cover for its exports, further depreciation in the dollar may have adverse impact on profits.[26]

Dr. Reddy's faces increased competition in international markets:

Prior to 2006, Dr. Reddy's benefited from a broader geographical reach than its competitors Mylan Laboratories (MYL) and Barr Pharmaceuticals (BRL). It also faced only limited competition in Russia and remains the dominant player in the Indian pharmaceutical market. Not even Merck (MRK)'s Sandoz or Teva Pharmaceutical Industries (TEVA) the largest generics companies had a presence in India. Dr. Reddy built its broad international presence by acquiring companies that already have access to target markets. The acquisition of betapharm, for instance, which allowed RDY to enter the German market was a big step, as this market has entries to barrier due to government regulation[27] Starting in 2007, however, competition in several markets, including Europe and India intensified. Mylan Laboratories (MYL)'s acquisition of Matrix in India and Merck (MRK)'s generic subsidiary increased its geographical reaches significantly. Barr has also made acquisitions from 2005 to 2007 that increase its international base.

Major growth of generics as branded companies fight back:

Dr. Reddy’s experienced massive growth in its generic sales from 2006 to 2007. At the end of 2006, generic products accounted for about 4 billion rupees of Dr. Reddy’s sales, and by 2007, this number was 33 billion rupees.[28] The reason for the surge in growth was Dr. Reddy’s agreement with Merck beginning in January 2006 which gave Dr. Reddy’s the right to produce Merck’s blockbuster drugs Proscar and Zocor if another company successfully challenged Merck’s patent.[29] Zocor had 2006 sales of around $4 billion, and the year it went off-patent, Dr. Reddy captured 55% of the generic sales, accounting for a huge jump in revenue for the company. Dr. Reddy's is the benefactor of a new trend in branded pharmaceutical companies approaching smaller generic manufacturers and offering the formulations to its drugs in case they are challenged. Generic companies have an incentive to challenge patents because if successful, they are awarded 190 days of exclusivity. To eliminate this lucrative incentive, companies such as Merck preempt the sale, and the result is that the challenger does not get less of a benefit. In this case, it received only 45% of the generic market for Zocor instead of 100%.

Aggressive expansion with low costs:

At the end of March, 2007, Dr. Reddy's had 69 Abbreviated New Drug Applications (ANDA) pending approval in the US. This is the application that allows a company to start manufacturing and selling a generic version of a pharmaceutical. This number of ANDA's is very large given Dr. Reddy's fairly new entry into the major generics market. It is larger than Mylan's 65, and Barr's 60, and close to Watson's 70In 2008, Dr. Reddy's has 37 product approvals and 10 tentative approvals from the US FDA, and so it can begin or continue to sell the 37 products but must wait for approval of the others.[30]

Movement into “Generic Drugs (Biogenerics and Biosimilars) ” ahead of the competition:

Dr. Reddy’s is in the process of expanding into a relatively new area of biogenerics. At the end of 2007, it produced and sold 2 different biogenerics in India, and is building the facilities to expand its capabilities. Biotech drugs are pharmaceuticals produced in cells. The technology is about 10-15 years old, and in 2015 to 2020 many of the original drugs will come off patent. There are few FDA regulations on generics for biotech drugs, and so they would be very easy to produce and sell quickly. The problem, however, is that the fermentation tanks and other infrastructure necessary to manufacture biotechs takes a long time to produce.[31]

Competition

Dr. Reddy's is facing increasing competition both around the world and in India. Mylan Laboratories (MYL) has begun expanding internationally, and in 2006 the company made its first foray into the Indian market. Teva and Novartis' generic business, Sandoz, are already major global players in Dr. Reddy's two biggest markets, Europe and the US. Both of these companies are able to compete effectively on price, which Dr. Reddy's has a unique advantage in given the cost of labor in India. Dr. Reddy's margins on generics are as high as 70% which is unheard of for many companies, but it does not have the breadth and distribution channels of the largest companies.

Revenue by Region in millions USD 2007 United States Europe India Rest of world
Dr. Reddy's[32]657344213 296
Mylan [33]1506501414
Novartis’s Sandoz[34]19594058--1152
Teva [35] 54282403-- 1577


Dr. Reddy's faces competition both from generic and brand name drug producers. Some of its top competitors include:

  • Mylan Laboratories (MYL) is the third largest generic producer in the US. Mylan also owns subsidiaries that produce proprietary drugs and hospital packages.
  • Barr Pharmaceuticals (BRL): is a split generic/brand manufacturer with about 75% of its sales in generics. Its main product line is contraceptives, and it is dominant in this market.
  • Sandoz, a generic division of Novartis AG (NVS). Sandoz's major therapeutic areas include antibiotics, preparations for treating the central nervous system, cardiovascular, hormones and anti allergic.
  • Teva Pharmaceutical Industries (TEVA). Teva Pharmaceuticals USA is one of the largest producers of generic drugs. Its products include therapeutic areas such as anti-infective, cardiovascular, oncology, dermatological and anti-inflammatory.
Sales vs, Income, 2007 (Millions USD)
Total Revenue Net Income
Dr. Reddy’s[36] $1510 $216
Mylan[37] $1612 $217
Teva[38] $9408 $1952
Barr[39] $2500 $218
Novartis’s Sandoz[40] $7169 $1039

Market Share on the basis of Retail Sales Due to high level of fragmentation none of the Pharma Companies had more than 6% of the total market on the basis of the total retail sales.[41]

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Market Share on the basis of Retail Sales[41]

References

  1. Vault India:Dr.Reddy's Laboratories
  2. Annual Report 2007-08, Page 4
  3. 3.0 3.1 3.2 3.3 Annual Report 2007-08, Page 19
  4. 4.0 4.1 Annual Report 2007-08, Page 23
  5. Brian Orelli. “Leading the Pack of Follow-On Drug Makers.” The Motley Fool, June 25, 2007
  6. Dr. Reddy’s 2008 20-F pg. 17
  7. Dr.Reddys Official website/ Coverview
  8. Dr. Reddy’s 2007 20-F pg. 16
  9. 9.0 9.1 9.2 9.3 Dr. Reddy’s 2008 20-F pg. 4
  10. 10.0 10.1 Yahoo Finance Dr.Reddy's Q3FY2009 results
  11. The Wall Street Journal 'Dr.Reddy's sales jump to 49%
  12. Annual Report 2007-08, Page 26
  13. Dr.Reddys Labs/Key Milestones/1984
  14. Dr.Reddys Labs/Key Milestones/1986
  15. Dr. Reddy’s 2008 20-F pg. 16
  16. Dr.Reddys Labs share holding pattern, rediff Money wiz
  17. 17.0 17.1 17.2 17.3 Dr. Reddy’s 2008 20-F pg. 55
  18. Dr. Reddy’s 2008 20-F pg. 19
  19. Dr. Reddy’s 2008 20-F pg. 17
  20. Dr. Reddy’s 2008 20-F pg. 47
  21. Dr. Reddy’s 2008 20-F pg. 26
  22. 22.0 22.1 22.2 22.3 Dr. Reddy’s 2008 20-F pg. 56
  23. 23.0 23.1 Dr. Reddy’s 2008 20-F pg. 28
  24. Dr. Reddy’s 2008 20-F pg. 57
  25. Dr. Reddy’s 2008 20-F pg. 43
  26. 26.0 26.1 26.2 Annual Report 2007-08, Page 25
  27. Dr. Reddy’s 2007 20-F pg. 26
  28. Dr. Reddy’s 2007 20-F pg. 16
  29. Dr. Reddy’s 2007 20-F pg. 26
  30. Dr. Reddy’s 2007 20-F pg. 25
  31. Brian Orelli. “Leading the Pack of Follow-On Drug Makers.” The Motley Fool, June 25, 2007
  32. Dr. Reddy's 2007 20-F
  33. Mylan 2007 10-K
  34. Novartis 2007 20-F
  35. Teva 2007 20-F
  36. Dr. Reddy's 2007 20-F pg. 16
  37. Mylan 2007 10-K pg. 31
  38. Teva 2007 20-F pg. 3
  39. Barr 2007 10-K pg. 45
  40. Novartis 2007 20-F pg. 90
  41. 41.0 41.1 Info.Shine/Industry Information/Pharmaceuticals
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