Company Update Institutional Equities Dr. Reddy s Laboratories 5 September 2017 Reuters: REDY.BO; Bloomberg: DRRD IN Suboxone Generic Opportunity To Be Lucrative, Can Sustain For Longer Time The district court of Delaware in the US has ruled that Dr. Reddy s Laboratories (DRL) generic version of Suboxone film does not infringe upon the US patents (8017150, 8603514, 8900497) as asserted by the innovator, Indivior. Suboxone film is indicated for the treatment of opioid dependence and generates ~US$720mn in annual sales in the US. DRL s launch timeline is now contingent on Actavis 180-day marketing exclusivity status and approval timeline for its generic version by the US Food and Drug Administration or USFDA. We have retained Buy rating on DRL with a target price of Rs3,020, up 38% from CMP. Approval and launch timing of DRL s Suboxone generic: DRL has responded to the complete response letter it received on its ANDA file on Suboxone and has been assigned a target action date in 4QFY18. Assuming the approval comes through, whether or not DRL can launch it imminently will depend on the following: 1. Whether the approval is tentative or final. 2. Outcome of federal court appeal. A final approval will mean that Actavis marketing exclusivity has been forfeited and DRL can launch its product imminently, but the same will be considered at risk until the appeal court s outcome (expected in 2QFY19-4QFY19). It is also possible that DRL and the innovator will enter into a settlement without getting into further litigation. If the USFDA gives DRL a tentative approval, it means Actavis 180-day marketing exclusivity stands and DRL will have to wait for launch until the federal court outcome. If Actavis fails to secure a final approval for its generic version within 75 days of federal court outcome, DRL can launch its ANDA. In such a scenario, the launch timeline will be close to 4QFY19. Potential competition for DRL: Besides direct competition from other generic players, Suboxone generic launch by DRL will also face competition from new generation long-acting drugs being developed for opioid dependence by other generic competitors. Mylan and Alvogen can launch in 1HFY20 - The district court hearing for Mylan and Alvogen is due in September 2017. Subsequently, a decision can be expected earliest by 4QFY18. This may go for a federal court appeal, which implies a final decision would come by 1QFY20-3QFY20. According to Indivior, it will be difficult for it to forecast any outcome of the upcoming litigation as all players have variations in their ANDA files. Actavis and Par enjoined from sale of Suboxone generics until 2024 The same district court that ruled in favour of DRL on Suboxone patent also issued a separate ruling denying Watson s (Actavis) and Par s motions to reopen the court s June 2016 judgment finding that their respective proposed generic products infringe valid claims of the 514 patent. Hence the court s ruling enjoining marketing approval and sale of Watson s and Par s proposed generic products until the expiry of the 514 patent in 2024 remains in place. Actavis is likely to go for a federal court appeal and a decision can be expected in 3QFY19-1QFY20. RBP-6000 once monthly Buprenorphine Indivior, which markets Suboxone film in the US, has developed a new generation version which enables once-a-month administration (injectable). The approval of RBP6000 is due in November 2017. As RBP6000 has the same active ingredient as Suboxone, it is expected that a part of Suboxone film sales in the US will be cannibalised. However, looking at the launch experience of another long acting drug (subdermal implant), the uptake doesn t seem to be encouraging. CAM-2038 - also once monthly injection - is expected to be approved in 1Q 2019 CAM 2038 is another once monthly injection for opioid dependence being developed by an Indivior competitor. The drug is also likely to be approved around the same time as RBP-6000. Market share estimate for DRL: We currently forecast 4QFY19 launch for DRL. We believe DRL will be the sole player in the market in FY19 and it may see an additional competitor in FY20. According to Indivior, it has not received litigation notice from any other generic player in the recent past except the one it is already engaged in litigation with. DRL ruling does not have implications for other ongoing litigations as each ANDA filer has a different claim. We assume 40% market share and 20% price erosion for DRL in FY19 which should translate to US$80mn in FY19E. We believe the long-acting versions that will be launched in FY19 will be slow in garnering market share. Our assumption of a slow uptake is based on a recently launched long-acting opioid dependence drug (Probuphine) by Braeburn Pharma in the US. DRL s sales in FY19 may also be aided by the opioid dependence market in general which is growing at the rate of 8-10% annually. BUY Sector: Pharmaceuticals CMP: Rs2,189 Target Price: Rs3,020 Upside: 38% Vishal Manchanda Research Analyst vishal.manchanda@nirmalbang.com +919737437148 Key Data Current Shares O/S (mn) 165.8 Mkt. Cap (Rsbn/US$bn) 363.9/5.7 52 Wk H / L (Rs) 3,400/1,901 Daily Vol. (3M NSE Avg.) 562,285 One Year Indexed Stock Performance 130 120 110 100 90 80 70 60 50 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Dr. Reddy s Laboratories Price Performance (%) 1 M 6 M 1 Yr Dr Reddy s Labs. (2.0) (23.5) (29.7) Nifty Index (1.5) 11.4 12.5 Source: Bloomberg NIFTY CNX NIFTY INDEX
Exhibit 1: Key financials Net sales 1,50,233 1,55,683 1,41,961 1,52,711 1,87,199 EBITDA 34,936 35,853 24,722 29,742 46,251 Net profit 23,364 21,306 12,921 14,337 27,809 EPS (Rs) 141 129 78 87 168 EPS growth (%) 19.0 (8.8) (39.4) 11.0 94.0 PER (x) 15.6 17.1 28.2 25.4 13.1 P/BV (x) 3.4 2.9 3.0 2.7 2.3 EV/EBITDA (x) 10.3 10.0 16.0 13.0 8.0 RoCE (%) 25.6 21.6 10.6 12.6 19.9 RoE (%) 21.6 17.0 10.5 10.8 17.7 2 Dr. Reddy s Laboratories
Financial statement Exhibit 2: Income statement Net sales 1,50,233 1,55,683 1,41,961 1,52,711 1,87,199 % growth 12.0 3.6 (8.8) 7.6 22.6 Raw material costs 39,793 40,008 36,965 37,415 41,810 Staff costs 29,446 31,174 31,068 32,621 34,252 R&D expenses 17,450 16,927 18,658 20,071 24,604 Other expenses 28,608 31,721 30,548 32,861 40,283 Total expenditure 1,15,297 1,19,830 1,17,239 1,22,968 1,40,949 EBITDA 34,936 35,853 24,722 29,742 46,251 % growth 7.5 2.6 (31.0) 20.3 55.5 Other income 2,741 2,950 1,715 773 2,613 Interest costs 1,082 826 634 634 634 Gross profit 1,10,440 1,15,675 1,04,996 1,15,296 1,45,389 % growth 11.2 4.7 (9.2) 9.8 26.1 Depreciation 7,599 9,389 10,266 11,114 11,988 Profit before tax 28,996 28,817 15,886 19,116 36,590 % growth 9.6 (0.6) (44.9) 20.3 91.4 Tax 5,632 7,511 2,965 4,779 8,782 Effective tax rate (%) 19.4 26.1 18.7 25.0 24.0 Net profit 23,364 21,306 12,921 14,337 27,809 % growth 19.0 (8.8) (39.4) 11.0 94.0 EPS (Rs) 141 129 78 87 168 % growth 19.0 (8.8) (39.4) 11.0 94.0 Exhibit 4: Balance sheet Other non-current assets 9,649 9,252 11,950 11,950 11,950 Current investments 34,259 35,034 14,271 14,271 14,271 Inventories 25,529 25,579 28,528 28,875 32,267 Debtors 40,698 41,250 37,986 40,862 50,091 Cash 5,395 4,921 3,865 13,065 38,276 Other current assets 12,215 11,156 12,187 12,187 12,187 Total current assets 1,18,096 1,17,940 96,837 1,09,261 1,47,092 Trade payables 8,493 9,068 10,569 10,698 11,954 Other current liabilities/provisions 33,384 31,685 30,004 31,888 37,932 Total current liabilities 41,877 40,753 40,573 42,586 49,886 Net current assets 76,219 77,187 56,264 66,675 97,205 Total assets 1,48,773 1,63,088 1,77,592 1,90,057 2,22,157 Exhibit 4: Exhibit 3: Cash flow PAT 23,364 21,306 12,921 14,337 27,809 Depreciation 7,599 9,389 10,266 11,114 11,988 Other income (2,741) (2,950) (1,715) (773) (2,613) (Inc.)/dec. in working capital (4,275) (667) (896) (1,211) (5,320) Cash flow from operations 23,947 27,078 20,576 23,467 31,864 Capital expenditure (10,660) (15,200) (13,886) (14,085) (14,871) Net cash after capex 13,287 11,878 6,690 9,382 16,993 Other investing activities (33,308) (5,361) (9,329) 1,690 3,926 Cash from financing activities 2,410 (6,991) 1,583 (1,872) 4,292 Opening cash balance 23,006 5,395 4,921 3,865 13,065 Closing cash balance 5,395 4,921 3,865 13,065 38,276 Change in cash balance (33,308) (5,361) (9,329) 1,690 3,926 Exhibit 5: Exhibit 5: Key ratios Y/E March FY15 FY16 FY17 FY18E FY19E Profitability & return ratios EBIT margin (%) 18.2 17.0 10.2 12.2 18.3 Net profit margin (%) 15.6 13.7 9.1 9.4 14.9 RoE (%) 21.6 17.0 10.5 10.8 17.7 RoCE (%) 25.6 21.6 10.6 12.6 19.9 Working capital & liquidity ratios Equity 852 853 829 829 829 Receivables (days) 88.6 94.7 100.5 92.9 87.5 Reserves 1,07,482 1,24,845 1,21,792 1,32,143 1,55,965 Inventory (days) 224.9 229.9 263.5 276.2 263.2 Net worth 1,08,334 1,25,698 1,22,621 1,32,972 1,56,794 Payables (days) 78.8 79.0 95.6 102.3 97.5 Total debt 36,164 33,403 49,075 51,189 59,467 Working capital (days) 234.7 245.7 268.3 266.8 253.2 Deferred tax liabilities 791 537 1,620 1,620 1,620 Current ratio (x) 2.8 2.9 2.4 2.6 2.9 Other non-current liabilities 3,484 3,450 4,276 4,276 4,276 Quick ratio (x) 2.2 2.3 1.7 1.9 2.3 Liabilities 1,48,773 1,63,088 1,77,592 1,90,057 2,22,157 Valuation ratios Net block 41,665 46,130 50,281 53,252 56,135 EV/sales (x) 2.4 2.3 2.8 2.5 2.0 Capital work-in-progress 5,280 6,626 6,095 6,095 6,095 EV/EBITDA (x) 10.3 10.0 16.0 13.0 8.0 Intangible assets 11,917 19,500 19,026 18,109 16,796 P/E (x) 15.6 17.1 28.2 25.4 13.1 Intangible assets under P/BV (x) 3.4 2.9 3.0 2.7 2.3 203 1,096 27,150 27,150 27,150 development Non-current investments 3,840 3,297 6,826 6,826 6,826 3 Dr. Reddy s Laboratories
Apr-16 Apr-16 May-16 Jun-16 Jul-16 Jul-16 Aug-16 Sep-16 Sep-16 Oct-16 Nov-16 Dec-16 Dec-16 Jan-17 Feb-17 Feb-17 Mar-17 Apr-17 May-17 May-17 Jun-17 Jul-17 Aug-17 Aug-17 Institutional Equities Rating track Date Rating Market price Target price (Rs) 10 June 2016 Buy 3,160 3,950 27July 2016 Buy 3,300 3,950 6 February 2017 Buy 3,142 3,950 15 May 2017 Buy 2,584 3,366 28 July 2017 Buy 2,620 3,020 Rating track graph 3,800 3,300 2,800 2,300 1,800 Not Covered Covered 4 Dr. Reddy s Laboratories
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