Maintain ‘outperform’ on Dr Reddy’s Laboratories (DRL) with a target price of Rs 4,477 a share. The gNexium approval — first approval after nearly a year — indicates that DRL’s FDA challenges are limited to the Srikakulam API facility (one of the company’s six API facilities) and that the company will also be able to successfully shift products filed from Srikakulam to other facilities.
Importantly, the nod eases concerns over DRL’s ability to get new ANDA approvals, which is critical to driving US generics growth.
DRL’s exposure to Venezuela and Russia remains a concern. However, a pick-up in US generics sales (with onset of new ANDA approvals), combined with gains from weakening rupee, should more than offset the impact of these concerns and drive earnings growth. The 7% q-o-q growth in the US in Q1FY16 despite lack of new approvals and 67.6% gross margins in the Global Generics business reflect the success of DRL’s R&D-focussed growth strategy.
DRL is the fourth generic to get approval for the drug after Teva, Mylan and Hetero. Net sales by the innovator stood at ~$1.8 billion before generic launch.
