Rating Remains Buy
Target Price Increased from 3556 INR 4779
Closing price 21 October 2015 INR 4174
Potential upside +14.5%
Anchor themes
DRRD is a play on US generics and pharmaceutical market growth in emerging markets. DRRD is also a play on the biosimilars opportunity which is likely to evolve over the next five years.
Nomura vs consensus
Our FY16F and FY17F estimates are in line with consensus. However, we expect stronger growth in FY18F vs street expectations.
Research analysts
India Pharmaceuticals
Saion Mukherjee - NFASL [email protected] +91 22 4037 4184
Ayan Deb - NFASL [email protected] +91 22 4037 4023
Key company data: See next page for company data and detailed price/index chart.
Dr Reddy's Laboratories
REDY.NS DRRD IN
EQUITY: HEALTH CARE & PHARMACEUTICALS
Reset 12m target price at INR 4779/sh
Investment in complex generics, proprietary products to drive growth
Maintain Buy
We retain our Buy rating on Dr Reddy’s with a new 12-month target price of INR
4779/sh. There are headwinds from emerging markets (EM) currency
depreciation and possible competition for a few products in the US. However
over the next two to three years, we believe these headwinds will be countered
by the high value of US launches and the launch of proprietary products. Dr
Reddy’s has consistently launched high-value products in the US leading to a
rise in average sales per ANDA approved. We expect this trend to continue as
the company has invested in complex generics. We believe that almost half of
the ANDA pipeline pending approval worth more than USD16bn in brand value
is not in the public domain, which can be a source of positive surprise. On
proprietary products, our market analysis suggests that each of four new filings
can generate more than USD50m in revenues. In EMs, particularly in Russia
and Venezuela, currency depreciation will hurt growth (factored in our
estimates), but the ability of the company to sustain growth ahead of the
respective markets is a positive. We project a 23% EPS CAGR over FY15-17
driven by expansion in gross and EBITDA margins. The margin expansion is
driven by complex US generics, operating leverage and proprietary products.
Catalysts
Product approval in the US – generic and proprietary products are the key
catalyst for stock performance.
Valuation
Dr Reddy’s is trading at 23.9x FY17E EPS of INR175 which is in line with
other large cap peers. We expect growth momentum to be relatively strong
beyond FY17F. We raise our valuation multiple to 23x vs 20x as we a) factor
in the impact of EM currency depreciation on earnings, and b) are relatively
less concerned with regulatory action at Srikakulam. Our target price of
INR4770 per share is based on 23x FY17-18 average EPS of INR208.
Year-end 31 Mar FY15
FY16F
FY17F
FY18F
Currency (INR) Actual Old New Old New Old New
Revenue (mn) 148,189 162,539 159,349 186,267 174,676
202,347
Reported net profit (mn) 22,179 23,534 26,251 30,334 29,899
41,194
Normalised net profit (mn) 22,179 23,534 26,251 30,334 29,899
41,194
FD normalised EPS 129.99 137.93 153.86 177.79 175.24
241.44
FD norm. EPS growth (%) 3.1 6.1 18.4 28.9 13.9
37.8
FD normalised P/E (x) 32.1 N/A 27.1 N/A 23.8 N/A 17.3
EV/EBITDA (x) 20.7 N/A 17.1 N/A 15.1 N/A 10.9
Price/book (x) 6.4 N/A 5.3 N/A 4.5 N/A 3.7
Dividend yield (%)
N/A
N/A
N/A
ROE (%) 21.9 19.7 21.5 21.3 20.5
23.4
Net debt/equity (%) 14.3 9.4 net cash net cash net cash
net cash
Source: Company data, Nomura estimates
Global Markets Research
23 October 2015
See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
Nomura | Dr Reddy's Laboratories 23 October 2015
2
Key data on Dr Reddy's Laboratories Relative performance chart
Source: Thomson Reuters, Nomura research
Notes:
Performance (%) 1M 3M 12M
Absolute (INR) 5.5 8.3 40.8 M cap (USDmn) 10,929.0
Absolute (USD) 6.3 5.7 32.5 Free float (%) 0.7
Rel to MSCI India 1.9 11.6 36.6 3-mth ADT (USDmn) 27.1
Income statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18F
Revenue 132,170 148,189 159,349 174,676 202,347
Cost of goods sold -62,977 -71,516 -74,505 -81,451 -88,897
Gross profit 69,193 76,673 84,845 93,225 113,451
SG&A -43,161 -50,387 -53,156 -57,539 -64,459
Employee share expense
Operating profit 26,032 26,286 31,689 35,686 48,992
EBITDA 32,640 35,016 41,138 46,431 60,712
Depreciation -4,804 -5,720 -6,526 -7,418 -8,288
Amortisation -1,804 -3,010 -2,924 -3,327 -3,432
EBIT 26,032 26,286 31,689 35,686 48,992
Net interest expense -189 -31 1,257 1,906 2,989
Associates & JCEs 174 195 195 195 195
Other income 589 1,713 300 300 300
Earnings before tax 26,606 28,163 33,441 38,087 52,476
Income tax -5,094 -5,984 -7,190 -8,189 -11,282
Net profit after tax 21,512 22,179 26,251 29,899 41,194
Minority interests 0 0 0 0 0
Other items
Preferred dividends
Normalised NPAT 21,512 22,179 26,251 29,899 41,194
Extraordinary items
Reported NPAT 21,512 22,179 26,251 29,899 41,194
Dividends -3,582 -4,102 -4,855 -5,530 -7,619
Transfer to reserves 17,930 18,077 21,396 24,369 33,575
Valuations and ratios
Reported P/E (x) 32.9 31.9 27.0 23.7 17.2
Normalised P/E (x) 32.9 31.9 27.0 23.7 17.2
FD normalised P/E (x) 33.1 32.1 27.1 23.8 17.3
Dividend yield (%)
Price/cashflow (x) 36.6 28.4 16.7 32.1 13.5
Price/book (x) 7.8 6.4 5.3 4.5 3.7
EV/EBITDA (x) 22.2 20.7 17.1 15.1 10.9
EV/EBIT (x) 27.8 27.5 22.2 19.6 13.5
Gross margin (%) 52.4 51.7 53.2 53.4 56.1
EBITDA margin (%) 24.7 23.6 25.8 26.6 30.0
EBIT margin (%) 19.7 17.7 19.9 20.4 24.2
Net margin (%) 16.3 15.0 16.5 17.1 20.4
Effective tax rate (%) 19.1 21.2 21.5 21.5 21.5
Dividend payout (%) 16.7 18.5 18.5 18.5 18.5
ROE (%) 26.3 21.9 21.5 20.5 23.4
ROA (pretax %) 17.5 15.1 16.5 17.4 22.6
Growth (%)
Revenue 13.7 12.1 7.5 9.6 15.8
EBITDA 19.3 7.3 17.5 12.9 30.8
Normalised EPS 28.0 3.1 18.4 13.9 37.8
Normalised FDEPS 28.0 3.1 18.4 13.9 37.8
Source: Company data, Nomura estimates
Cashflow statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18F
EBITDA 32,640 35,016 41,138 46,431 60,712
Change in working capital -4,874 -3,360 8,375 -16,283 3,183
Other operating cashflow -8,303 -6,623 -6,995 -7,994 -11,087
Cashflow from operations 19,463 25,033 42,519 22,155 52,808
Capital expenditure -10,081 -9,339 -11,000 -10,000 -10,000
Free cashflow 9,382 15,694 31,519 12,155 42,808
Reduction in investments -7,090 -8,290 300 300 300
Net acquisitions -432 -5,816 -9,588 -3,250 0
Dec in other LT assets
Inc in other LT liabilities
Adjustments 1,752 -527 2,520 3,169 4,252
CF after investing acts 3,612 1,061 24,752 12,374 47,359
Cash dividends -2,985 -3,587 -4,102 -4,855 -5,530
Equity issue 2 206 0 0 0
Debt issue 3,932 352 0 0 0
Convertible debt issue
Others -1,246 -1,089 -1,264 -1,264 -1,263
CF from financial acts -297 -4,118 -5,366 -6,119 -6,792
Net cashflow 3,315 -3,057 19,386 6,255 40,567
Beginning cash 5,136 8,451 5,394 24,780 31,035
Ending cash 8,451 5,394 24,780 31,035 71,602
Ending net debt 15,684 15,874 -3,512 -9,767 -50,334
Balance sheet (INRmn) As at 31 Mar FY14 FY15 FY16F FY17F FY18F
Cash & equivalents 8,451 5,394 24,780 31,035 71,602
Marketable securities 25,637 35,060 35,060 35,060 35,060
Accounts receivable 33,037 40,755 37,828 48,313 51,474
Inventories 23,992 25,529 24,376 29,864 29,340
Other current assets 12,630 13,101 13,732 14,610 16,167
Total current assets 103,747 119,839 135,777 158,883 203,643
LT investments 0 2,817 2,817 2,817 2,817
Fixed assets 44,424 48,090 52,564 55,146 56,859
Goodwill 3,428 3,380 3,703 3,703 3,703
Other intangible assets 11,269 13,050 19,391 19,314 15,882
Other LT assets 7,354 7,586 7,586 7,586 7,586
Total assets 170,223 194,762 221,838 247,449 290,490
Short-term debt 3,395 6,962 6,962 6,962 6,962
Accounts payable 10,503 10,660 14,293 12,828 16,775
Other current liabilities 40,165 46,374 47,668 49,701 53,131
Total current liabilities 54,063 63,995 68,923 69,490 76,867
Long-term debt 20,740 14,307 14,307 14,307 14,307
Convertible debt
Other LT liabilities 4,619 5,158 5,158 5,158 5,158
Total liabilities 79,422 83,460 88,388 88,955 96,332
Minority interest 0 0 0 0 0
Preferred stock
Common stock 851 852 852 852 852
Retained earnings 89,950 110,450 132,599 157,642 193,306
Proposed dividends
Other equity and reserves
Total shareholders' equity 90,801 111,302 133,451 158,494 194,158
Total equity & liabilities 170,223 194,762 221,839 247,449 290,490
Liquidity (x)
Current ratio 1.92 1.87 1.97 2.29 2.65
Interest cover 137.7 847.9 na na na
Leverage
Net debt/EBITDA (x) 0.48 0.45 net cash net cash net cash
Net debt/equity (%) 17.3 14.3 net cash net cash net cash
Per share
Reported EPS (INR) 126.70 130.64 154.62 176.10 242.63
Norm EPS (INR) 126.70 130.64 154.62 176.10 242.63
FD norm EPS (INR) 126.08 129.99 153.86 175.24 241.44
BVPS (INR) 534.63 654.72 785.00 932.32 1,142.11
DPS (INR)
Activity (days)
Days receivable 89.8 90.9 90.2 90.0 90.0
Days inventory 132.1 126.4 122.6 121.5 121.5
Days payable 64.8 54.0 61.3 60.8 60.8
Cash cycle 157.1 163.2 151.5 150.8 150.8
Source: Company data, Nomura estimates
Nomura | Dr Reddy's Laboratories 23 October 2015
3
Executive Summary
Dr Reddy’s stock is up 30% YTD vs -0.8% return for the broader market. The stock
trades at a PE of 23.9x FY17E EPS of INR175 which is in line with other large cap peers.
The stock faces headwinds from currency depreciation in EM (Russia and Venezuela)
and incremental competition in a few high value products in the US in the near term. We
have factored the additional competition and currency depreciation into our estimates.
Our estimates factor in INR/RUB at 1.05 and VEF/USD at 15 from FY17 onwards.
Despite, the near-term headwinds we remain constructive over the medium to long term
for the following reasons:
• US generics can surprise on the upside on back of complex product launches: Dr
Reddy’s has consciously moved away from vanilla generics to focus on complex
products. The strategy has borne fruit to an extent as is reflected in consistent rise in
sales per ANDA, which has risen from USD 3mn/ANDA in FY08 to USD 7mn/ANDA in
FY16F. Particularly in the past three years FY13-16, the contribution from low
competition relatively complex products has increased with incremental sales per
ANDA over FY13-16 at USD20m. According to the company, 51% of the products
pending approval as of end FY15 are complex. Dr Reddy’s is investing in new
formulation platforms and has made considerable progress in areas like complex
injectables, softgel and transdermals, which are likely to be commercialised over next
two years. The company expects more filings of non-oral solid formulations going
forward. The rate of ANDA approval for Dr Reddy’s has slowed with just two approvals
in FY16 so far, but we expect the number of approvals to stabilise at 10-15 going
forward. An analysis of Dr Reddy’s pipeline suggests that almost 50% of the pending
ANDAs with brand value of >USD 16bn is not in the public domain. Hence, these can
be a source of positive surprise in our view.
• Proprietary products business could see a step up in growth over next two to
three years: Dr Reddy’s proprietary development programme focusses on the derma
and neurology segments. With three NDA filings (DFD-1, DFD-9, DFN-11) and one in-
licensed product (Xeglyze), there are four potential launches in the proprietary product
business over the next 12-18 months. The company expects each of these assets to
achieve annual sales of USD50-75m soon after launch. Our analysis of the market
suggests that the stated sales can be achieved given the market size and the
differentiation that these products bring. The company intends to file two NDAs every
12 months. The next set of filings is expected to be higher on innovation quotient, some
are patent protected and the company expects to achieve sales of USD100-300m from
these later filings.
• Biosimilars currently have low visibility but hold long term potential: We like Dr
Reddy’s strategy to develop products where close similarities can be established. Dr
Reddy’s is focusing on closely similar products which have no structural differences
with the innovator products or have only minor differences which are established to not
have any impact on safety and efficacy. Such an approach is likely to succeed under
the newly laid out guidelines by the USFDA. Over the next five years, any meaningful
contribution from biosimilars in the development markets is unlikely. Even in EMs, there
is limited visibility on product approvals. The company has guided for USD150-200m in
revenues from EM by FY20 from USD40m in FY15. We have not factored in
management. guidance in our estimates yet, as visibility on approvals are lower.
• Steady performance in India and other EM in constant currency terms: Dr Reddy’s
has grown ahead of the broader markets in constant currency terms in the key markets
of India, Russia and Venezuela. We expect the outperformance to sustain.
• Margins can expand: Despite weaker currencies (we have factored in RUB/INR at
1.05 and VEF/USD at 15 from FY17F), and some competition in US products the
EBITDA margins can expand due to a) high value launches in US generics; b)
increased volumes in PSAI from a low base; c) proprietary product launches and d)
operating leverage as we expect R&D spend and to an extent SG&A to fall as
percentages of sales. The rise in R&D spend for biosimilars and proprietary products is
Nomura | Dr Reddy's Laboratories 23 October 2015
4
likely to be modest going forward. We factor in EBITDA margin to expand to 29.4% in
FY18F from 23% in FY15.
We project EPS CAGR at 23% over FY15-18F. Dr Reddy’s balance sheet remains
strong with expected net cash at USD970m by end FY18F. Dr Reddy’s has been
relatively less acquisitive in the recent past compared to peers (Lupin, Sun Pharma,
Cipla). With a stronger balance sheet, the company may pursue inorganic opportunities
more aggressively.
At INR4174 per share, Dr Reddy’s is trading at 23.9x FY17E EPS of INR175/sh which is
in line with other large cap peers. We had earlier valued Dr Reddy’s at 20x one year
forward earnings at a discount to peers due to our concerns on currency volatility in EM,
regulatory uncertainty around Srikakulam. The risk around Srikakulam remains, but with
passage of time (it is almost one year since inspection) the risk of escalation or an
adverse regulatory action has fallen, in our view. Further, we have factored in currency
depreciation and lowered our EM growth estimates. We therefore, attribute a valuation of
23x one year earnings to arrive at our target price. Our 12m target price is INR4779
based on 23x one year forward (FY17-18F average) fully diluted EPS of INR 208 per
share. We believe the recent re-rating in the stock is justified and is likely to be
sustained.
Nomura | Dr Reddy's Laboratories 23 October 2015
5
US Generics: Moving away from Vanilla products; Higher focus complex generics
Dr Reddy’s has been very selective in product selection compared to peers. The
company has focussed on products with API (Active Pharmaceutical Ingredient) and
formulation complexity, which it believes will present a higher margin and more
sustainable revenue streams. In the process the company avoided pursuing certain large
blockbuster products. For instance, Dr Reddy’s did not file for gAbilify (brand sales:
USD7bn) and did not participate in the first wave of commercialisation of gCymbalta
(brand sales: USD4bn). In hindsight, these were attractive opportunities as competition
turned out to be less intense, than originally expected, and pricing was attractive. In our
report US Generic Weekly 20 October 2015, we highlight the change in pricing trend
seen in the expiration of recent patents. Our analysis suggests that generic pricing for
large brand products post generic entry was stronger in the recent past ( 2013-2015)
than before (2010-2012). Earlier price drops were sudden and large after the 180 days
exclusivity period as multiple generics entered the market. The pricing drop in expiries in
the recent past has been more gradual. The higher pricing has provided significant gains
over the last few quarters though may not be sustained over longer term, in our view.
Despite missing such product specific opportunities, the strategy of being selective has
helped deliver strong and sustained growth in the US. The rise in per ANDA over the
period indicates incremental contribution from relatively higher value launches. In Fig 1,
we plot US sales per ANDA (ex-acquisitions and one-time exclusivity sales). The sales
per ANDA recorded a consistent increase over the years from USD3m/ANDA in FY08 to
USD 7mn in FY16F. Over FY13-16, contribution from high value launches has been
stronger and as a result sales per ANDA increased at a higher pace. The incremental
sales per ANDA (incremental sales per incremental ANDA approved) over FY13-16F is
impressive at USD 20m/ANDA.
Fig. 1: Sales per ANDA (INR mn)
Improvement driven by launch of high value products
Source: Company, Nomura Research
The strategy to focus on select complex generics opportunities remain. In fact there is a
consistent increase in the level of complexity. This is reflected in increase in proportion of
non- oral solid products in the pipeline. The proportion of oral solids in the pending
ANDA pipeline has declined from 76% in FY11 to 56% in FY15, as per company. The
company believes that 51% of the products pending approval is complex as of end FY15
vs 37% in FY11.
2.86
3.32 3.47
4.06 4.244.49
5.49
6.47
7.03
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 E
Sales/ANDA
Nomura | Dr Reddy's Laboratories 23 October 2015
6
Fig. 2: Formulation split (Number of pending ANDAs)
No of pending ANDAs at 76, 65 and 68 end of FY11, FY13 and FY15 respectively
Source: Company
In terms of value, the proportion of complex products filed has risen from 29% in FY12 to
57% in FY15. Going forward, the proportion of oral solids in terms of value of filings will
drop from 67% in FY16 to 49% in FY20, according to the company. The API (Active
Pharmaceutical Ingredient) development efforts are also aligned to support the filing of
complex products as almost 85% of the API being developed has technology and/or IP
complexity.
Fig. 3: Product filings in value terms
More than half of the filings in FY15 is classified as complex in value terms, as per company
Source: Company
0%
10%
20%
30%
40%
50%
60%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY11 FY13 FY15
Oral Solid Injections Softgel, Topical % complex (RHS)
29% 33%38%
57%
71% 67%62%
43%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY12 FY13 FY14 FY15
Complex Generics Vanila Generics
Nomura | Dr Reddy's Laboratories 23 October 2015
7
Fig. 4: Product filings in future in terms of formulation (Value based)
Contribution from non oral solids In ANDA filings will increase
Source: Company
Fig. 5: API under development
% of the number of products under development
Source: Company
Historically, Dr Reddy’s has had strong API development capabilities reflected in early
DMF (Drug Master File) filings for several complex products. The company in the recent
past complemented its API strength with investments in complex formulation platforms.
Some of these investments are with partners. The various formulation development
efforts are shown in Fig 6 below. Overall nine ANDAs have been filed using these
technology platforms and 24 more are in development and are likely to be filed over the
next three years. Between the products filed and likely to be filed in next three years, we
believe the portfolio addresses a market size of USD 15-20bn.
67% 63%55% 53% 49%
33% 37%45% 47% 51%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
FY16F FY17F FY18F FY19F FY20F
Oral Solids Non Oral Solids
45%
40%
15%
Technology complexity IP complexity Others
Nomura | Dr Reddy's Laboratories 23 October 2015
8
Fig. 6: New formulation platform addressed
Segments Description No of filings made
No of filings expected in next three
years
Comments
Microspheres
The technology is used for development of long acting injectables. In the formulation the drug particle or the active ingredient is spread as a monolithic sphere in a polymeric matrix. Dr Reddy's is addressing the platform primarily through the acquisition of Octoplus. Some of the microsphere based products include Respiridal Consta, sandostatin LAR, Zoladex, Lupron depot.
0 2
We expect 2 filings over the next 2-3 years with total brands sales of USD2.5bn.
Liposomal drugs
Like microspheres, Liposomes are nano particle based drug delivery systems. Liposomal technology is used to encapsulate a drug in lipid sphere and the drug is delivered over to a targeted site. Some of the key drugs based on the technology include Doxil
0 2
Two near term filings - One in FY16F and one in FY17F. Sales of both the products put together is ~USD1bn
Ready to use formulation
Ready to use formulations are premixed injectable formulation where in the diluent is not required to be added separately. This leads to increased convenience.
0 4
The company expects four near term filings under 505b(2) route with market size of USD3.1bn
Derma Topical products including ointments, creams, emulsion 3 7
Dr Reddy's has filed three ANDAs in FY15. The development of seven ANDAs in progress (total market size of USD3.5bn) which is likely to be filed over the next two years
Transdermal The patches are developed along with a partner. 2 3
The company has filed two ANDAs (including Rivastigmine tartarate) and three additional ANDA are likely to be filed in next two to three years
Softgels Softgel capsules and includes products like Lovaza, Pentasa 4 3
The company has made four filings in FY15 and three additional products are under development which are likely to be filed in the next three years
Respiratory Working on MDIs and DPIs with partners 0 3
Three products under development with a market size of USD3bn. There is limited visibility on filing timeline at this stage.
Source: Company, Nomura ests
Approval rate is slow; pipeline visibility is low- But complex low competition products can continue to surprise
The ANDA approval rate for Dr Reddy’s has slowed significantly in the past two years
(Fig 7). However, despite the slowdown, US sales have remained strong on the back of
selective high impact launches and market share gains.
Nomura | Dr Reddy's Laboratories 23 October 2015
9
Fig. 7: ANDA approvals and average timeline (months) for approvals
Source: USFDA, Nomura Research
As for the rest of the industry the average timeline of approvals has risen for Dr Reddy’s.
However with just two approvals with Nexium’s final approval coming in 115 months post
filing, the average for FY16 is skewed on the higher side. Over time we expect the
number of approvals to settle at 10-15 per year. We assess that more than 50% of the
pending filings are more than three years old (Fig 8).
Fig. 8: Dr Reddy’s ANDA age profile
Pending ANDA age No of ANDAs pending
<6 months 6
6-18 months 13
18-30months 13
30-42months 17
42-54months 10
>54months 14
Total 73
Source: Company, Nomura Research
The visibility of the ANDA pipeline, in terms of known ANDAs is relatively lower. For
instance, out of 73 pending ANDAs as of end June 2015 only 34 are in the public
domain. There is limited clarity on more than 50% of the portfolio, which have brand
sales in excess of USD16bn in our view. Given, Dr Reddy’s track record of investing in
complex products, and successes demonstrated in the recent past, there is room for
positive surprises from unknown products, in our view.
Proprietary products- Strong traction likely over the next five years
Dr Reddy’s proprietary development programme focusses on the derma and neurology
segments. With three NDA filings (DFD-1, DFD-9, DFN-11) and one in-licensed product
(Xeglyze), there are four potential launches in the proprietary product business over the
next 12-18 months. The company expects each of these assets to achieve annual sales
of USD50-75m soon after launch. Our analysis of the market place (presented below)
suggests that the stated sales can be achieved given the market size and the
differentiation that these products bring. However, most of these products are not
-
10
20
30
40
50
60
70
80
90
-
5
10
15
20
25
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
ANDA approvals (#, LHS) ANDA approval duration (months, RHS)
Nomura | Dr Reddy's Laboratories 23 October 2015
10
protected by patents and hence are at risk of generic competition post the exclusivity
period which could be for a period of three years. The company intends to file two NDAs
every 12 months. The potential fall in sales from generic competition to the first set of
products would probably be negated by launches from the next set of filings. The next
set of filings are expected to be higher on innovation quotient, some are patent protected
and the company expects to achieve sales of USD100-300m from these later filings.
Dr Reddy’s licensed Xeglyze from Hatchtech; Product has the potential to reach
USD 00m in sales
Dr Reddy’s signed a commercial deal with Hatchtech, an Australian pharma company
that has developed Xeglyze lotion for treatment of lice infestation. Dr Reddy’s get
exclusive commercialisation rights in the US, Canada, India, Russia and the CIS,
Australia, New Zealand and Venezuela. NDA for Xeglyze was filed with the USFDA
recently. The API abametapir was developed in collaboration with Dr Reddy’s PSAI
division. As per the agreement Dr Reddy’s will pay an upfront amount of USD10mn and
up to USD 50m on achieving pre-commercialisation milestones. We reckon that the deal
size is significant and to an extent indicates the market potential of the product.
The lice infection is ~USD250m prescription market in the US based on the IMS data.
There are a few prescription product launches in the US for treatment of lice in the recent
past. Xeglyze will compete against other currently available prescription products. The
product has three positives, combined in one a) the product attacks and destroys not
only lice but eggs as well; b) as a result the treatment protocol is one application for 10
minutes and a repeat treatment is not required; and c) the product is contraindicated for
children only under six months old, compared to other options where contraindication is
at a much higher age (four to six years). Therefore, given these advantages, the product
can grow close to the sales of Sklice, the most successful and recently approved anti lice
product. In Fig 9 we present a comparison of Xeglyze with other competing products in
the market.
Fig. 9: Key lice treatment options
Product Molecule Corporation Annual sales
(USD mn) Approval
year Impact on lice/Egg
Repeat treatment needed
Contraindication age
Xeglyze Abametapir Dr Reddy's
Lice+Egg No <6 months
Sklice Ivermectin Sanofi 73 2012 Lice+Egg No <6 months
Natroba Spinosad Parapro LLc 24 2011 Lice+Egg Yes <4 years
Ulesfia Benzyl Alcohol
Zylera Pharma 10 2009 Lice Yes <6 months
Ovide Malathion Taro 32 1982 Lice+Egg Yes < 6 years
Permethrin Permethrin Perrigo/Allergan 124 1986 Lice Yes <2 months
Source: IMS, Nomura estimates
As indicated in the figure above Xeglyze come close to Sklice in terms efficacy and
safety profile. However, based on the disclosed clinical trial data, we find Xeglyze to be
superior. The success rate after 14 days of the treatment is 81.5% for Xeglyze
compared to 73% for Sklice.
Nomura | Dr Reddy's Laboratories 23 October 2015
11
Fig. 10: Prescription volumes of Sklice has moved up significantly in recent past
Xeglyze has the potential to be as or more successful than Sklice
Source: IMS
DFD -1: Spray platform for Psoriasis
DFD -01 is developed for the treatment of Psoriasis. It is a topical corticosteroid
delivered in a spray platform and combines the benefits of cream, lotions, foams and
sprays. The corticosteroid is combined with a superior emollient vehicle. As per company
it has strong Phase 3 data both for placebo controlled trials and head to head with a high
potency steroid RLD. The topical anti psoriasis market is estimated at ~USD 500m
based on the IMS data. The key topical products used for the treatment of Psoriasis is
indicated in Fig 11 below. With superior flow characteristics, better emollient we expect
sales in excess of USD50mn. The product has not been granted any patent. However,
the product may get exclusivity related to new formulations, in our view.
Fig. 11: Topical psoriasis treatment products
Topical anti psoriasis market Is approx USD 500m
Molecule Formulations MAT Sales (USD mn)
Betamethasone + Calcipotriene Emulsion 120
Tazarotene Cream 109
Calcipotriene Cream 87
Betamethasone + Calcipotriene Ointment 69
Tazarotene Jelly 44
Calcipotriene Ointment 43
Calcitriol Ointment 19
Calcipotriene Emulsion 7
Tazarotene Foam 5
Calcipotriene Foam 4
Anthralin Emulsion 2
Anthralin Cream 0
Source: IMS, Nomura Research
0.0K
5.0K
10.0K
15.0K
20.0K
25.0K
30.0K
35.0K
TR
x V
olu
me
Nomura | Dr Reddy's Laboratories 23 October 2015
12
DFD -09: Product competes with Oracea, a USD 350m product
This is a modified release doxycycline indicated for treatment of rosacea. The product
would compete with Oracea as it would have same label as Oracea but without the
restrictions on meals. Oracea is prescribed to be taken on an empty stomach either one
hour before a meal or two hours after the meal. Oracea has achieved sales of USD
350m. Hence, we believe DFD 09 could get closer to USD 100m in peak sales. We are
not aware of any significant patent protection on this product. Hence post the new
formulation exclusivity period, the product will be subjected to generic competition.
DFN-11: A drug device combination likely to compete with injectable triptans
DFN-11 is a drug device combination of an approved triptan. Triptans are used for
treatment of migraines. The orally administered products take longer to have an impact
due to lower bio availability. DFN-11 attempts to optimise the availability in the first 15
minutes. The injectable triptans available in the market also achieve the maximum
concentration (TMax) in 15 minutes. According to the company, the product has fewer
side effects vs existing injections. The device is not disclosed and it could be a novel
injectable device, in our view. The company has completed three bioequivalence studies.
The overall injectable triptan market is USD230m as per IMS. However, the product will
face competition from existing injectable formulations both branded and generic.
The NDA is filed for all the above products. Hence, the products could be
commercialised in FY17F. Conservatively we have assumed revenue contribution from
FY18F. We factor in revenues of USD47m, USD94m and USD187m in FY18F, FY19F
and FY20F respectively.
Biosimilars; Targeting molecules where similarity can be closely established
DRRD is the largest Indian biosimilar player but others are catching up
DRRD started investment for development of biosimilars in the late 1990s. We believe
DRRD’s biosimilar sales are currently ~USD 40m (FY15), making it possibly the largest
Indian biosimilar manufacturer. To date DRRD has commercialised four biosimilars in
India and other emerging markets. The products commercialised include GCSF, peg
GCSF, Darbepoetin and Rituximab. India accounts for slightly more than half of the
entire biosimilar sales for Dr Reddy’s, in our view.
Fig. 12: DRRD biosimilar sales (USD mn)
Source: Company, Nomura estimates
14
19
26
35
40
0
5
10
15
20
25
30
35
40
45
FY11 FY12 FY13 FY14 FY15
Nomura | Dr Reddy's Laboratories 23 October 2015
13
Over the years, other Indian companies particularly Biocon, Zydus Cadila and Intas have
stepped up development activities in biosimilar and have closed the gap. In Fig 13 we list
the key companies in Biosimilars and products launched so far.
Fig. 13: Biosimilar products sold in India
Company Marketed products
Dr Reddy's GCSF, peg GCSF, Darbepoetin, Rituximab
Biocon GCSF, EPO, Insulin, Glargine, Trastuzumab
Zydus Cadila GCSF, peg GCSF, Interferon alpha, peg Interferon alpha, EPO, Adalimumab
Cipla Etanercept, Darbepoetin (Hetero)
Intas GSCF, peg GCSF, Interferon alpha, EPO, Factor VIII, FSH, Rituximab
Emcure GSCF, Peg GCSF,GMSCF, EPO
Reliance Lifesciences EPO, GCSF, Interferon alpha, FSH, Interferon beta, Abciximab, hCG
Wockhardt EPO, Insulin
Shantha Biotech EPO, Interferon alpha
Source: Nomura Research
In the early wave, the launches by Indian companies were limited to relatively simpler
biologics like GCSF (filgrastim), EPO, interferons etc. Increasingly Indian companies
have launched complex biologics- monoclonal antibodies, pegylated GSCF, EPO.
DRRD’s Rituximab and CDH’s Adalimumab are the first ever generics launched for
Rituxan and Humira globally.
Selecting highly similar products for development
The regulatory pathway for approval of biosimilars in the US and Europe have evolved,
but still is marred with uncertainties. Dr Reddy’s is focusing on closely similar products
which have no structural differences with the innovator products or have only minor
differences which are established to not have any impact on safety and efficacy. Such an
approach is likely to succeed under the newly laid out guidelines by the USFDA.
The US has laid out a systematic step-by-step approach of establishing biosimilarity (Fig.
14). The pathway mandates development of a highly similar product and a clinical
evaluation is carried out only after a high degree of similarity is established. There is
strong regulatory focus on the early steps of structural and biological characterisation. A
strong case of biosimilarity could be made through these early studies. This we believe
will help minimise expenses for clinical trials, thereby making the development efforts
more economical. As Fig 14 indicates, the development efforts for biosimilars is very
different from development of a new molecule, where clinical evaluation is critical and
more time consuming and expensive.
Nomura | Dr Reddy's Laboratories 23 October 2015
14
Fig. 14: Biosimilar development is not the same as innovator drugs; after all it is a generic copy
Source: Quintiles presentation
Global development programmes- Five Biosimilars in Phase I
Dr Reddy’s is undertaking the development of five biosimilars – pegGCSF, Darbepoetin,
Rituximab, Trastuzumab and Bevacizumab in the first wave. By FY20, all these products
are likely to be registered and launched in key emerging markets. For the US market, Dr
Reddy’s has started clinical trials for peg GCSF and Rituximab. The clinical programmes
for Trastzumab and Bevacizumab are likely to start in FY16, according to the company.
We estimate that these five products have global sales of USD28bn.
Fig. 15: Products targeted by Dr Reddy’s in the first phase
Product Sales (USD bn) US EU Japan ROW Global
Rituximab 3.6 2.2 0.2 1.5 7.5
peg GCSF 3.7 0.8
0.2 4.6
Trastuzumab 2.2 2.7 0.3 2.0 7.2
Bevacizumab 2.9 2.1 0.8 1.2 7.0
Darbepoetin 0.8 0.7 0.5 0.5 1.9
Total 13.2 8.5 1.8 5.3 28.3
Source: Nomura Research
Dr Reddy’s expects biosimilar revenues of USD150-200m in FY20 from emerging
markets, up from USD40m currently. With more than USD5bn in ROW market sales, the
projections are achievable in our view, provided the approvals come through in key EMs.
We note that Biocad in Russia, achieved annual sales of USD150m just from Rituximab
(primarily in Russia) in 2014.
Given Dr Reddy’s focus on similarity and development of one product across all markets,
the success in EM should assist the company’s case for approval in regulated markets,
in our view.
Though we are positive on the long term prospects, we have limited clarity to factor
meaningful biosimilar revenues in our estimates, given the regulatory challenges.
Nomura | Dr Reddy's Laboratories 23 October 2015
15
Domestic formulations – Execution has improved
The focus on the domestic formulation business has increased in the recent past. Dr
Reddy’s presence in the domestic business is rather limited vs peers as the portfolio
covers just over 40% of the Indian pharmaceutical market (IPM) compared to more than
60% for larger peers. The strategy has been to focus on select therapies and products
rather being expansionary. The total number of brands sold by Dr Reddy’s in India has
remained largely unchanged over the past five years. The company has been able to
record gradual improvements in sales force productivity.
Fig. 16: No of brands in domestic market
There Is no Increase in number of brands in India
Source: Company, Nomura Research
Fig. 17: Field force ramped up in the past two years
Source: Company, Nomura Research
In Jun 2015, Dr Reddy’s acquired select brands from UCB. The acquired brands are
primarily in respiratory, derma and paediatrics segments. As part of the deal, Dr Reddy’s
also acquired 350 employees from UCB, largely comprising the field force. Dr Reddy’s
has acquired the portfolio for INR8bn (EUR118mn). The acquired brands’ sales were at
INR1.5bn as of CY14, which implies EV/sales multiple of 5.3x. This transaction
demonstrates Dr Reddy’s increased focus on the domestic pharma market, in our view.
The acquisition strengthens Dr Reddy’s existing respiratory product portfolio, particularly
40.00
45.00
50.00
55.00
60.00
65.00
70.00
100
150
200
250
300
350
FY11 FY12 FY13 FY14 FY15
No of brands in India (LHS) Sales per brand (INRmn, RHS)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
3800
4000
4200
4400
4600
4800
5000
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5400
FY11 FY12 FY13 FY14 FY15
Field force (Including Managers), LHS Sales per Avg field force (INR mn), RHS
Nomura | Dr Reddy's Laboratories 23 October 2015
16
in the cough & cold and allergy segments. Given relatively higher margin of the UCB
business, the deal is likely to be marginally EPS accretive in the near term.
Emerging Markets: Expect contribution to fall substantially in FY17
EM contributed 20% of revenues in FY15. Russia (48% of EM sales) and Venezuela
(27% of EM sales) accounted for 75% of the EM sales in FY15. However, with
currencies depreciating, we expect the contribution from EM to fall significantly over the
next three years.
Fig. 18: Emerging market sales
INR mn FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F
Russia 8,900 11,000 14,048 16,300 14,922 10,899 12,054 13,621
CIS 1,958 2,260 2,860 3,519 2,791 3,197 3,763 4,402
Venezuela 1,162 1,222 1,925 2,945 8,335 6,603 3,931 4,717
Others 797 1,848 2,504 2,842 3,125 4,046 4,653 5,350
Total 12,817 16,330 21,337 25,606 29,173 24,745 24,400 28,091
Total Revenues 74,693 96,737 116,266 132,170 148,189 159,349 174,676 202,347
EM as % of Revenues 17.2% 16.9% 18.4% 19.4% 19.7% 15.5% 14.0% 13.9%
Source: Company, Nomura estimates
In Russia, the product concentration has gradually come down. The contribution from top
four products has declined from 74% in FY09 to 60% in FY15. Increased focus on the
over the counter (OTC) segment has helped reduce concentration and regulatory risks
related to pricing control. The OTC segment contributed 35-40% in the last three years
up from 8% in FY08.
Fig. 19: Russia sales mix
Better diversified portfolio
Source: Company
Market conditions in Russia have been challenging as volumes have been declining over
the past three years. In terms of value Dr Reddy’s has delivered stronger growth vs the
broader market in most years, over the past five years, but the growth momentum has
slowed.
0%
10%
20%
30%
40%
50%
60%
70%
80%
FY09 FY10 FY11 FY12 FY13 FY14 FY15
OTC as % of sales Top 4 products as % of sales
Nomura | Dr Reddy's Laboratories 23 October 2015
17
Fig. 20: Growth rate in Russia
Dr Reddy's growth Is presented In constant currency terms
Source: Company, Nomura estimates
In Venezuela, Dr Reddy’s benefited from a situation of shortages. The growth is largely
driven by volume increases rather than price increase. This is reflected in the IMS data.
As per IMS for the 12month ending March 2015, the value and volume growth for the
Venezuela pharma market was 52.5% and -1.65%, respectively, implying that average
prices have moved up 55%. In contrast the value and volume increase for Dr Reddy’s
over the period was 149.7% and 141.2% respectively implying price increases of just
3.5%. The company is now among the top 20 pharma companies in Venezuela with
1.78% market share.
Dr Reddy’s continues to book revenues at the fixed exchange rate of 6.3 VEF/USD,
However the rate of repatriation has slowed with the outstanding balance rising to
USD60m in September 2015 compared to USD40m as at the end of March 2015. This
we believe could slow volume growth in the near term as the company limits the risk of
devaluation. In our estimates we are factoring in 15 VEF/USD as the exchange rate from
4QFY16. We note that Glenmark has already started to book revenues at this exchange
rate.
Financials
Revenue projections: Expect 13% revenue CAGR over FY16-18F
Fig. 21: Revenue projection
INR mn FY12 FY13 FY14 FY15 FY16F FY17F FY18F CAGR (FY16-18)
India 12,931 14,560 15,713 17,870 22,001 25,362 28,814 14%
US 31,889 37,846 55,303 64,723 76,412 85,527 100,137 14%
Russia 11,000 14,048 16,300 14,922 10,899 12,054 13,621 12%
CIS+Others 6,164 8,393 10,878 15,848 13,846 12,346 14,470 2%
Europe 8,259 7,716 6,970 7,193 8,024 8,587 9,016 6%
PSAI 23,812 30,702 23,974 25,456 24,614 26,800 28,842 8%
Proprietary products 1,078 1,468 1,778 1,013 2,297 2,586 5,892 60%
Others 1,604 1,533 1,254 1,164 1,256 1,414 1,556 11%
Total 96,737 116,266 132,170 148,189 159,349 174,676 202,347 13%
Source: Company, Nomura estimates
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
FY10 FY11 FY12 FY13 FY14 FY15
Dr Reddy Market
Nomura | Dr Reddy's Laboratories 23 October 2015
18
a) North America: We expect revenues to rise to USD1.54bn in FY18F from USD1.2bn
in FY16F. The rise of USD 337m in sales over a two year period is in line with past
increases. We estimate the revenue per ANDA for the base business (ex acquisition,
one off exclusivities) is projected to rise to USD8.1mn vs USD7.0mn in FY16F. We
project some slowdown in FY17 due to expected competition in gArixtra, gDacogen
and gValcyte. The fall in revenues from existing products we believe is negated by
the sustained launch of low competition products as in the past.
b) India: We expect Dr Reddy’s to sustain growth ahead of the broader market in low to
mid teen.
c) Venezuela: We factor in INR/VEF of 4.3 compared to current exchange of INR/VEF
of 10.3 from 4QFY16 onwards. As a result, we factor in a sharp decline in sales in
FY17F. We factor in 20% growth in constant currency terms.
d) Russia: For sales we factor in constant currency growth of 13% Y-Y over FY16-18.
e) PSAI (Pharmaceutical Services & Active Ingredients): Revenues declined 17% over
FY13-15.We project sales to further decline by 3% in FY16F. Decline in PSAI sales
ex Mexico subsidiary is even stronger at 30% over FY13-16F. Over the period,
however, Dr Reddy’s has maintained the pace of DMF filings globally. Sales per
cumulative DMF declined from INR53m in FY13 to INR31m in FY16F. Over FY17-
18F we factor in high single digit growth rate from a low base.
f) Proprietary products: Dr Reddy’s can potentially launch four new products over the
next 12-18 months. We believe each of these new launches has revenue potential in
excess of USD50mn. Conservatively we do not factor in any revenue from new
launches in FY17. We factor in USD47m from new introductions in FY18F. We
estimate proprietary product sales (ex Zenatane) at USD90mn, USD142m and
USD240m in FY18F, FY19F and FY20F respectively. Our estimate is lower than
management guidance of more than USD200m in proprietary revenues in FY19F.
The proprietary product business loss increased significantly to INR5bn in FY15
primarily due to higher research and development (R&D) expenditure. We expect the
EBIT loss to sustain at the current level until FY18F as we do not factor in any
material rise in proprietary product sales. However, we expect a significant reduction
in losses after FY18F.
Fig. 22: Proprietary business financials
The company expects >USD200m revenue in FY19F
INR mn FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E
Sales 294 513 532 1,078 1,468 1,778 1,013 2,297 2,586 5,892 9,223 15,630
EBIT -2,093 -1,641 -1,857 -2,135 -2,542 -2,028 -5,371 -5,083 -5,878 -4,963 -2,513 2,585
Source: Company, Nomura estimates
g) Biosimilars: Sales until FY15 will largely be in EMs and revenue stream from
regulated markets will be limited, in our view. Management has guided for biosimilar
revenues of USD150-200m in FY20F up from USD40m in FY15 (our estimates). Our
modest growth estimates for EM+India at 7% CAGR over FY15-20F is conservative
given limited visibility on approval process.
Expect margins to expand
a) We factor in generic business margins to remain at 65-67% over the next three years.
We expect currency depreciation in Ems to be negated by US launches.
b) The PSAI business margin we estimate will rise to 30% by FY18 from 22% in FY15
on back of pick up in volumes from low base.
c) The overall gross margin improvement of 270bps over FY15-18 is also driven by pick
up in proprietary product sales.
d) We expect operating leverage to play a role in EBITDA margin expansion. SG&A and
R&D spend as percentage of sales is expected to gradually trend lower over the next
Nomura | Dr Reddy's Laboratories 23 October 2015
19
three years. R&D spend in biosimilars and proprietary products is likely to grow at
much modest pace.
e) We project EBITDA margin to rise to 29.4% in FY18F from 23% in FY15.
Strong balance sheet
We expect annual capex at INR10-11bn over FY16F-18F. In addition we factor in
acquisition related spend of INR12.8bn. These are related to acquisition of UCB portfolio
in India, rights for Xeglyze and fondaparinux. With steady capex and improvement in
margins, we forecast net cash balance to rise to USD970m by FY18F. Dr Reddy’s has
been relatively less acquisitive in the recent past compared to peers (Lupin, Sun
Pharma, Cipla). With stronger balance sheet, the company may pursue inorganic
opportunities more aggressively.
Fig. 23: Change in estimates
Source: Nomura estimates
Valuations: Reset 12m target price at INR 4779
At INR4174 per share, Dr Reddy’s is trading at 23.9x FY17E EPS of INR175 which is in
line with other large cap peers. With significant investment in R&D already made and
track record of launching low competition products, likely launch of new proprietary
products, we expect growth momentum to be relatively strong beyond FY17F.
We were valuing Dr Reddy’s at 20x one year forward earnings at a discount to peers due
to our concerns on currency volatility in EM, regulatory uncertainty around Srikakulam.
The risk around Srikakulam remains, but with passage of time (it is almost one year
since inspection) the risk of escalation or an adverse regulatory action has reduced, in
our view. Further, we have factored in currency depreciation and lowered our EM growth
estimates. We therefore, attribute a valuation of 23x one year earnings to arrive at our
target price. Our 12m target price is INR4779 based on 23x one year forward (FY17-18F
average) fully diluted EPS of INR 208. We believe the recent re-rating in the stock is
justified and is likely to be sustained.
Key Risks: a) Delay in approvals for high value products in the US; b) Regulatory action
at Srikakulam or any other key facilities supplying to the US market and c) adverse
currency movements.
Revenue split
INR mn FY16F FY17F FY16F FY17F FY16F FY17F
Domestic business 21,666 25,106 22,001 25,362 2% 1%
ROW 30,269 33,755 24,745 24,400 -18% -28%
Europe 6,765 7,043 8,024 8,587 19% 22%
US 75,648 90,155 76,412 85,527 1% -5%
PSAI 25,838 27,188 24,614 26,800 -5% -1%
Proprietary +Others 2,353 3,021 3,553 4,001 51% 32%
Total 162,539 186,267 159,349 174,676 -2% -6%
P&L
INR mn FY16F FY17F FY16F FY17F FY16F FY17F
Revenues 162,539 186,267 159,349 174,676 -2% -6%
EBITDA 37,699 46,692 40,138 45,335 6% -3%
Net profit 23,534 30,334 26,251 29,899 12% -1%
% Chg
% ChgNew
NewOld
Old
Revenue split INR FY16F FY17F FY16F FY17F FY16F FY17F Domestic business 21,666 25,106 22,001 25,362 2 1% RO 30,269 33,755 24,745 24,400 -18% -28% Europ 6,765 7,043 8,024 8,587 19 22
U 75,648 90,155 76,412 85,527 1 -
PSAI 25,838 27,188 24,614 26,800 - -
Proprietary +Others 2,353 3,021 3,553 4,001 51 32
Total 162,53 186,267 159,34 174,67 - -
P&L INR mn FY16F FY17F FY16F FY17F FY16F FY17F Revenues 162,53 186,267 159,34 174,67 - -
EBITD 37,699 46,692 40,138 45,335 6 -
Net 23,534 30,334 26,251 29,899 12 -
% Chg
% Chg Ne
NeOld
Old
Nomura | Dr Reddy's Laboratories 23 October 2015
20
Fig. 24: One year forward PE chart
The re-rating in the stock is justified
Source: Company, Nomura estimates, Bloomberg
Fig. 25: PE comparison with peer group
CMP (INR) FY16F FY17F FY18F
Dr Reddy's 4,174 27.2 23.9 17.3
Sun Pharma 889 36.1 21.7 20.1
Cipla 677 28.2 25.2 20.5
Lupin 2,061 36.8 23.3 21.0
Source: Company, Nomura estimates, Bloomberg
6
10
14
18
22
26
30
Jan-0
9
Ma
r-0
9
Ma
y-0
9
Jul-0
9
Sep-0
9
No
v-0
9
Jan-1
0
Ma
r-1
0
Ma
y-1
0
Jul-1
0
Sep-1
0
No
v-1
0
Jan-1
1
Ma
r-1
1
Ma
y-1
1
Jul-1
1
Sep-1
1
No
v-1
1
Jan-1
2
Ma
r-1
2
Ma
y-1
2
Jul-1
2
Sep-1
2
No
v-1
2
Jan-1
3
Ma
r-1
3
Ma
y-1
3
Jul-1
3
Sep-1
3
No
v-1
3
Jan-1
4
Ma
r-1
4
Ma
y-1
4
Jul-1
4
Sep-1
4
No
v-1
4
Jan-1
5
Ma
r-1
5
Ma
y-1
5
Jul-1
5
Sep-1
5
DRRD forward P/E Average 1 stdev 1 stdev
Nomura | Dr Reddy's Laboratories 23 October 2015
21
Appendix A-1
Analyst Certification
We, Saion Mukherjee and Ayan Deb, hereby certify (1) that the views expressed in this Research report accurately reflect our
personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this
Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by
Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures
The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more
Nomura Group companies.
Materially mentioned issuers
Issuer Ticker Price Price date Stock rating Sector rating Disclosures
Dr Reddy's Laboratories DRRD IN INR 4174 21-Oct-2015 Buy N/A
Dr Reddy's Laboratories (DRRD IN) INR 4174 (21-Oct-2015)
Rating and target price chart (three year history)
Buy (Sector rating: N/A)
Date Rating Target price Closing price
13-May-15
3,556.00 3,494.15
30-Jan-15
3,532.00 3,233.25
10-Dec-14
3,793.00 3,401.60
31-Jul-14
3,031.00 2,808.70
30-Jun-14
2,913.00 2,624.05
21-May-14
2,826.00 2,300.05
12-Feb-14
2,888.00 2,615.40
26-Nov-13
2,784.00 2,411.40
31-Jul-13
2,518.00 2,281.20
15-Feb-13
2,238.00 1,818.90
30-Oct-12
2,130.00 1,724.30
For explanation of ratings refer to the stock rating keys located after chart(s)
Valuation Methodology We value DRRD at 23x FY17-18 avg EPS forecast of INR208, which derives a TP of INR4,779. The benchmark index for this stock is MSCI India.
Risks that may impede the achievement of the target price Key Risks: a) Delay in approvals for high value products in the
US; b) Regulatory action at Srikakulam or any other key facilities supplying to the US market and c) adverse currency movements.
Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
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STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap.
SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned.
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SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates. Disclaimers This document contains material that has been prepared by the Nomura entity identified on page 1 and/or with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are also specified on page 1 or identified elsewhere in the document. The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries and may refer to one or
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more Nomura Group companies including: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. 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