Despite FDA?s acceptance of Fondaparinux ANDA under priority review, delay in the launch of gArixtra has been a major disappointment. Since 26 months have already elapsed post filing of ANDA, we believe the launch is imminent (based on average review time of 27-30 months for non-prioritised generics). Potential upside for Dr Reddy?s Laboratories (DRL) from this opportunity could be significant (incremental EPS of R3.7/7.4 per share in FY12/13E) as it is likely to remain a limited competition opportunity for at least next two-three years.
We believe the concerns over withdrawal of DEPB incentives (June 30, 2011) have been overdone (6% correction). DRL exports to the US and other markets account for about 80% of total FY11 sales and DRL has earned R1 billion (1% of sales) of export incentives under the scheme.
However, post withdrawal, the company will switch to duty drawback scheme which will replace some loss of incentives restricting negative impact to 3-4%, which we believe can be incrementally passed on in the form of price hikes. However, assuming full loss of incentives, the impact is likely to be capped to about 4-5% of FY13E EPS.
DRL?s revenue guidance of $2.7 billion by FY13 offers 23% upsides ($300-400 million of potential sales) from consensus and our estimates at $2.2-2.3 billion. The guidance is based on fair visibility on base case, which implies 27% CAGR in revenue and 45%, 40%, and 15% incremental contribution to growth from US, EM & PSAI and EU, respectively. We believe, with improved operating performance and enhanced visibility of niche launches in US, there are strong possibilities for estimates upgrades across the Street.
DRL is a strong play on the patent cliff opportunity in the US and has aggressive pipeline of 37 Para IVs including 10 FTFs. We estimate revenue to post 18% CAGR to $2.27 billion led by base business growth of 16% and incremental sales of $ 330 million from niche opportunities in the US. Our SOTP(Sum of the parts) based fair value at R1,950 values base business at 21x FY13E core EPS and assigns R94/share as NPV of Para IVs. We reiterate ?Buy/Sector Outperformer? recommendation/rating on the stock . Fondaparinux approval is a key trigger in near term.
Edelweiss