We expect Dr Reddy?s to be among the key beneficiaries of the import alert imposed on Wockhardt?s Chikalthana plant. While this would primarily be in the form of greater share and possibly better pricing in Toprol XL, there could be some upside in products such as Prevacid DR and Lamictal ER as well.
Dr Reddy?s remains our top large-cap pick in Indian Pharma. The USFDA has imposed an import alert on Wockhardt?s Chikalthana plant, which supplies several niche products (especially XRs) to the US market. Wockhardt will now have to exit the market in these products until it resolves the issues leading to the import alert or makes alternative manufacturing arrangements. We believe this would take time and expect pricing/competitive dynamics in these products to improve in the interim. Dr Reddy?s should be a key beneficiary, in our view.
Toprol XL is a large, limited competition product, with only four generic players (Wockhardt, Actavis, Mylan, Dr Reddy?s) in the market.
We estimate that Wockhardt had revenues of cUS$120m from this product, with just over 20% market share while Dr Reddy?s (the last entrant) currently has c13% share.
If Wockhardt?s share gets evenly divided among the other three players, even without assuming any pricing strength, it could translate into cUS$40m incremental (and highly profitable) revenues (c5-6% of US sales) from Toprol XL for Dr Reddy?s.
We assign a target multiple of 22x to Dr Reddy?s, which gives us a target price of R3,145. We use a target multiple of 22x to value DRL ? a 10% discount to its peers like Sun and Lupin.
Citi