Retain ‘buy’ on Dr Reddy’s, target R2,400

We expect injectable launches to be a key medium-term growth driver for Dr Reddy’s in the US generics business.

Written by Kotak Institutional Equities | Published: June 22, 2013 5:23:45 am

We expect injectable launches to be a key medium-term growth driver for Dr Reddy’s in the US generics business.

Pipeline efforts in injectables indicate the focus on complex generics and oncology provide visibility on building a sustainable US portfolio. The recent acquisition of OctoPlus will accelerate efforts in long acting injectables/lipid-based formulations.

We expect these efforts to be key drivers for margin expansion in the generics segment. Retain ‘buy’ with an increased target price at R2,400 — due to EPS increase of 4% and 6% in FY14 and FY15 estimated EPS,respectively.

The injectable portfolio for Dr Reddy’s has been gaining traction in the US with the recent launches of Zometa/Reclast and ramp-up in Fondaparinux. The segment still remains relatively small at $60-65 million in sales for FY13 (9-10% of US core sales) from a sales standpoint.

However,we believe the contribution from injectable is likely to increase in the near-term (to more than $100 million in FY14) with expected launches of generic Vidaza and Dacogen. Sumatriptan auto-injector can also be an interesting launch in the near-term. The incremental launches in injectables are likely to be limited competition,which will aid the recovery in generic gross margin.

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