FY15 ended on a mixed note for Dr Reddy’s Laboratories—Q4 adjusted profit after tax beat our estimates by 9% and US sales held up well, but margins were hit by currency.
Good signs in the US (i) Sales were flat quarter-on-quarter despite a seasonally high Q3—MS (market share) gains in gValcyte, gSirolimus & Habitrol sales; (ii) gNexium refiled via tech transfer, awaiting FDA response; (iii) 4-5 potentially meaningful launches in FY16: most not dependent on Srikakulam; (iv) gCopaxone approval unlikely in FY16.
EM (emerging market) currency risk—Russia manageable, but watchful on Venezuela (i) Russia sales, booked at
average of 1.4 rouble/INR vs. current spot of 1.25, has started hedging once again; (ii) No worry on receivables or trade’s liquidity, but downtrading to cheaper generics may be a challenge; (iii) Venezuela net monetary assets (excluding payables from subsidiary to parent) written down to SIMADI rate (a new mechanism for currency exchange): a $14m hit; (iv) Has received some repatriation (c5%) 10-12 days back, current outstanding of $35m;
(v) Calibrated approach to growth – sees long-term value in this market.
R&D Day to provide colour on drivers beyond traditional generics 40% of its R&D spend is on proprietary products (recently filed 3 NDAs—new drug applications) and biologics. We expect more colour on these efforts on the R&D Day on May 18. We believe this is a free option in the stock, given that costs are absorbed and not much upside is built in estimates or valuations.
Implications
We believe Dr Reddys has weathered many transient challenges in FY15—US approval slowdown, currency volatility, higher R&D spend—and looks reasonably well-placed to deliver growth once US approvals pick up again. We believe risk-reward is favourable. Buy.
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