dr reddy's laboratoriesbreport.myiris.com/nfasipl/drredlab_20151023.pdfoct 23, 2015 ·...

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


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



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


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.


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

http://researchcdn.nomuranow.com/01/p/ns/7/6/7/7/767758/Nomura_767758.pdf?pid=767758&appname=GRP&cid=RHRoMVl1bWZWbEE90&tid=exp=1445459770~acl=/*~hmac=9d49618ba65b5e35ed68d3bb41bf6f57c39b0b35e65cee15f5b108ccdb31a116


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


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


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.


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


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)


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.


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


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

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26

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20

25

30

35

40

45

FY11 FY12 FY13 FY14 FY15


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.


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.


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


Fig. 17: Field force ramped up in the past two years


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


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

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5400


Field force (Including Managers), LHS Sales per Avg field force (INR mn), RHS


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%


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


17

Fig. 20: Growth rate in Russia

Dr Reddy's growth Is presented In constant currency terms


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%


0%

5%

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15%

20%

25%

30%

35%

40%

45%

FY10 FY11 FY12 FY13 FY14 FY15

Dr Reddy Market


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


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


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


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

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Jul-0

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9

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v-0

9

Jan-1

0

Ma

r-1

0

Ma

y-1

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Jul-1

0

Sep-1

0

No

v-1

0

Jan-1

1

Ma

r-1

1

Ma

y-1

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Jul-1

1

Sep-1

1

No

v-1

1

Jan-1

2

Ma

r-1

2

Ma

y-1

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Jul-1

2

Sep-1

2

No

v-1

2

Jan-1

3

Ma

r-1

3

Ma

y-1

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Jul-1

3

Sep-1

3

No

v-1

3

Jan-1

4

Ma

r-1

4

Ma

y-1

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Jul-1

4

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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


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.

http://www.nomuranow.com/research

http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx

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Nomura Global Financial Products Inc. (“NGFP”) Nomura Derivative Products Inc. (“NDPI”) and Nomura International plc. (“NIplc”) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 50% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with this rating are investment banking clients of the Nomura Group*. 41% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 53% of companies with this rating are investment banking clients of the Nomura Group*. 9% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 19% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 September 2015. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price.

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.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies.

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. (‘NSM’), Malaysia; NIHK, Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; CIN No: U74140MH2007PTC169116, SEBI Registration No. for Stock Broking activities : BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034; SEBI Registration No. for Merchant Banking : INM000011419; SEBI Registration No. for Research: INH000001014 and NIplc, Madrid Branch (‘NIplc, Madrid’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under a Research Assistance Agreement. ‘NSFSPL’ next to an employee’s name on the front page of a research report indicates that the individual is employed by Nomura Structured Finance Services Private Limited to provide assistance to certain Nomura entities under inter-company agreements. 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Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (within the meaning of applicable regulations in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third-party content in any form is prohibited except with the prior written permission of the related third-party. Third-party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third-party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third-party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. 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Nomura Group produces a number of different types of research product including, among others, fundamental analysis and quantitative analysis; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc. NIplc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. NIplc is a member of the London Stock Exchange. This document does not constitute a personal recommendation within the meaning of applicable regulations in the UK, or take into account the particular investment objectives, financial situations, or needs of individual investors. This document is intended only for investors who are 'eligible counterparties' or 'professional clients' for the purposes of applicable regulations in the UK, and may not, therefore, be redistributed to persons who are 'retail clients' for such purposes. This document has been approved by NIHK,

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which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. The entity that prepared this document permits its separately operated affiliates within the Nomura Group to make copies of such documents available to their clients. This document has not been approved for distribution to persons other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ (as defined by the Capital Markets Authority) in the Kingdom of Saudi Arabia (‘Saudi Arabia’) or 'professional clients' (as defined by the Dubai Financial Services Authority) in the United Arab Emirates (‘UAE’) or a ‘Market Counterparty’ or ‘Business Customers’ (as defined by the Qatar Financial Centre Regulatory Authority) in the State of Qatar (‘Qatar’) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or in Qatar or to any person other than ‘Authorised Persons’, ‘Exempt Persons’ or ‘Institutions’ located in Saudi Arabia or 'professional clients' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar . By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are an ‘Authorised Person’, an ‘Exempt Person’ or an ‘Institution’ in Saudi Arabia or that you are a 'professional client' in the UAE or a ‘Market Counterparty’ or ‘Business Customers’ in Qatar and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia or Qatar. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2015 Nomura International (Hong Kong) Ltd. All rights reserved.


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