Shares of Indian pharmaceutical company Dr. Reddy’s Laboratories have enriched investors by 34% YTD, fully met our investment expectations and significantly outperformed the Indian stock market.
Positive results of FDA inspections at the company’s manufacturing bases played in favour of the issuer’s strength, and the company’s serious trump card is the generic anticancer blockbuster Revlimid, which has opened new horizons for the company in terms of revenue and profit growth.
We assign a Buy rating to Dr. Reddy’s Laboratories shares and a 12-month target price of INR 6603 with a potential upside of 17%.
Dr. Reddy’s Laboratories is an Indian pharmaceutical company that manufactures generics, active pharmaceutical substances and biosimilars.
Dr. Reddy’s is the second largest pharmaceutical company in India by sales. It is headquartered in Hyderabad, Telangana.
Dr. Reddy’s wide range of generics includes drugs for the treatment of gastrointestinal diseases, various types of cancer, cardiovascular diseases, central nervous system diseases, infectious diseases, and others.
Dr. Reddy’s has more than 200 generics in more than 20 countries around the world, and these more affordable medicines save the day for people who cannot afford expensive original medicines.
In many emerging markets, Dr. Reddy’s branded generics lead their segments, including such names as Omez, Naiz, Ketorol, Raso, Cetrin and Ibuklin, which are almost universally heard even in Russia.
An important event for Dr. Reddy’s Laboratories in 2022 was a patent agreement with the US-based Celgene, owned by Bristol Myers, under which the Indian company received the right to launch a generic of the blockbuster drug Revlimid. This is a real gold mine for Dr Reddy’s Laboratories in the long term, and the effect of generic Revlimid is already visible in the dynamics of quarterly results.
In fiscal 2023, the company’s revenue increased by 14.7% YoY to Rs 245.879 billion and net profit increased by 91.2% to Rs 45.067 billion. In the first quarter of fiscal 2024 with the end of June, Dr. Reddy’s revenue rose 29.2% YoY to Rs 67.384 billion and net profit increased 18.1% YoY to Rs 14.025 billion.
The company is currently trading at a discount of around 17% relative to peers on forward-looking P/E, EV/EBITDA and P/S multiples for the next 12 months.
Risks for Dr. Reddy’s Laboratories include unfavourable currency movements and competition from other Indian generics producers.
Issuer Description and Growth Factors
Dr Reddy’s Laboratories is an Indian pharmaceutical company that manufactures generics, active pharmaceutical substances and biosimilars. The company was founded in 1984 by entrepreneur Kallam Angi Reddy’s.
Dr Reddy’s is India’s second largest pharmaceutical company by sales. It is headquartered in Hyderabad, Telangana. Dr. Reddy’s wide range of generics includes drugs for the treatment of gastrointestinal diseases, various types of cancer, cardiovascular diseases, central nervous system diseases, infectious diseases, and others.
Generics – drugs-analogues having the same chemical composition and similar clinical effect, but more affordable in comparison with the original. Interchangeability with the original drug is proved by appropriate studies. Biosimilars – biological medicinal products containing a version of the same active substance as the original biological medicinal product (reference) already authorised for use in medicine. The supplier company proves similarity to the reference biological medicinal product in terms of quality, biological activity, safety and efficacy on the basis of comprehensive comparative studies and receives approval for its commercialisation.
The ability of Dr. Reddy’s Laboratories to produce high-quality drugs at affordable prices is due to the fact that the company has one of the largest manufacturing bases in India and controls the entire value-added cycle, from the production of active ingredients to the marketing of finished drugs.
In many emerging markets, Dr. Reddy’s branded generics are leaders in their segments, including such names as Omez (omeprazole), Naiz (nimesulide), Ketorol (ketorolac thromethamine), Razo (rabeprazole), Cetirin (Cetirizine) and Ibuklin (Paracetamol + ibuprofen), which are almost universally heard even in Russia.
The production of active pharmaceutical substances (ingredients) and pharmaceutical services is another business line of Dr. Reddy’s that generates the smallest share of annual revenues. The company was originally established as a manufacturer of active pharmaceutical substances and has nearly 40 years of experience in this field. Dr. Reddy’s supplies active ingredients to leading pharmaceutical companies in the United States, Europe, Latin America and Asia.
Research and development in the field of generics and biosimilars is a strong point of Dr. Reddy’s, the company has 9 R&D centres globally and has registered more than 1000 patents. Dr. Reddy’s has a product line of over 1,000 products across all business lines. Dr. Reddy’s key R&D centre, IPDO, is located in Hyderabad and includes several laboratories, one of which has recently opened specialising in nutraceuticals.
An important milestone for Dr. Reddy’s Laboratories in 2022 was a patent agreement with US-based Celgene, owned by pharmaceutical company Bristol Myers Squibb, under which the Indian company was granted the right to launch a generic of the blockbuster drug Revlimid. Sales of Bristol Myers’ Revlimid drug were $12.8bn in 2021 and declined to $0bn in 2022 due to competition from Indian generics.
The launch of sales of generic Revlimid by Dr. Reddy’s occurred in September 2022. Under the agreement, Dr. Reddy’s will be able to sell a fixed volume of its generic, and this volume has been kept confidential.
The limit on sales of the generic version of the blockbuster cancer drug will remain in place until 2026, when Reddy’s will be able to sell it indefinitely. Although the size of the permitted supply volume of the new generic Dr. Reddy’s is unknown, given the multi-billion dollar sales volume of the original drug, it is clear that this is a real gold mine for the Indian company in the long term, and this is already evident in the dynamics of quarterly results.
Dr. Reddy’s shares for the period since the beginning of 2023 show dynamics much better than the market – they are in the plus by 34% with the Indian stock index Sensex rising only by 8%.
The stock return dynamics of DR. Reddy’s labs compared to the Sensex index
Dr. Reddy’s stock has had plenty of reasons to rise in recent months – the US FDA inspected the company’s plant in Andhra Pradesh and did not give Dr. Reddy’s a single comment on the results of the inspection.
Dr Reddy’s is one of the few Indian pharma companies with a perfect inspection history from the FDA, with all its active ingredient manufacturing bases having been inspected without a hitch.
We believe that the outlook outperformance of Dr. Reddy’s stock will continue in the coming year on the back of constructive sales expectations for generic Revlimid and other new products.
Financials
Dr. Reddy’s Laboratories’ annual revenue trend is on a long-term uptrend and we expect continued growth in both metrics in FY2024-2025. The company’s net income has shown mixed trends in recent years, the jump in FY2023 was due to some one-off items understating the 2022 base
In fiscal 2023, the company’s revenue increased by 14.7% YoY to Rs 245.879 billion and net profit increased by 91.2% to Rs 45.067 billion. In the first quarter of fiscal 2024 with an end in June, Dr. Reddy’s revenue increased 29.2% YoY to Rs 67.384 billion and net profit increased 18.1% YoY to Rs 14.025 billion.
The continued strong growth in financial performance in the last quarter is driven by good sales momentum of generic Revlimid, and forecasts for fiscal FY2024-2026 reflect the expected solid growth. The company’s EBITDA and net margins have reached new levels from 2023 onwards, thanks to the generic of the blockbuster anti-cancer drug.
