Dr. Reddy's Q2 Review: Brokerages Retain 'Buy' On Better U.S. Prospects, Product Launches

Analysts remain optimistic about Dr. Reddy's Laboratories Ltd.'s U.S. prospects with more product launches in the offing.

The drugmaker's revenue from the North America market, which contributes a third of the total sales, rose 9% sequentially in the quarter ended September. That was driven by new launches and increase in volumes of certain of existing products, though partly offset by price erosion in some molecules.

The company's overall profit and revenue, too, jumped over the preceding three months.

A niche product portfolio in the U.S., coupled with anticipated growth in emerging markets, vaccine opportunity, and Dr. Reddy's entry in China, prompted most analysts to maintain their 'buy' rating on the stock.

Shares of Dr. Reddy's rose 3.77% in around noon on Monday. Of the 43 analysts tracking the company, 35 have a 'buy' rating, six suggest a 'hold' and two recommend a 'sell', according to Bloomberg data. The 12-month consensus price target implies an upside of 13%.

Here's what brokerages have to say about Dr. Reddy's Q2 FY22 results:

• Upgrades to ‘buy’ with a target price of Rs 5,470 apiece, implying an upside of 17%.

• Results ahead of estimates with growth across geographies.

• This upside target is based on:

  1. Limited competition products pipeline for the U.S. market.

  2. Superior execution in domestic formulations and other emerging markets.

  3. Cost control-driven improvement in operating leverage.

  4. Better prospects from China.

  5. The stock’s attractive valuation.

• Covid-19-related opportunities like Sputnik V in other countries (ex-India) and Molnupiravir (for influenza) could act as potential triggers over the near-to-medium term.

• Maintains ‘buy’ with a target price of Rs 5,673 apiece, implying an upside of 21.5% from Friday’s closing.

• The U.S. clocked 9% quarter-on-quarter growth on new products and Vascepa (heart attack, stroke); Russia benefited from hospital tenders; rest of the world and India were boosted by Covid-19.

• The estimate is ex-Sputnik, but export opportunity still exists for the product.

• Dr. Reddy’s has been in talks with several countries for vaccine supply and is waiting for export embargo to be lifted in India. The size of the opportunity, however, is not clear.

• Bullish on the company's U.S. prospects.

• Expects Dr. Reddy’s product launch momentum to remain robust in second half based on annual launch guidance of 20-25.

• Revlimid (blood cancer) to be launched in FY23; Vascepa to be ramped up in FY22.

• FY23 injectable portfolio launch in the U.S.

• Top pick in the sector given its growth outlook, strong balance sheet, quality leadership and PE multiple.

• Maintains ‘buy’ with a target price of Rs 5,856 apiece, implying an upside of 25.7%.

• Ebidta/profit after tax higher than estimates even after excluding upsides from two licensing deals in proprietary products.

• The results highlight the company’s aggressive growth strategy across markets (not dependent only on the U.S.) organically and through partnership or mergers and acquisitions.

• The growth has come at the expense of lower gross margins, as material cost to sales have reached a decade high.

• The diversification reduces volatility and helps leverage front and back-end infrastructure optimally.

• Management expects biosimilar to start contributing in a meaningful

  manner starting from CY24 onwards.

• The U.S. FDA inspection with eight observations was triggered by pending approval of a specific product (pre-approval inspection), and the management said the observations are addressable.

• Recommends 'buy’ with a target price of Rs 5,400 apiece, implying an upside of 15.6% from Friday's closing.

• Strong revenue growth across India, the U.S. and RoW markets.

• Strong research and development pipeline across key markets to drive growth. Large part of R&D expense to be incurred on biosimilar, said the management.

• Q2 FY22 margins show marked improvement even after adjusting for licensing income.

• Expects earnings momentum to continue with:

  1. Certain Covid related opportunities in export markets.

  2. Pick up in the U.S. generic business with cost optimisation beyond FY22.

  3. Strong pipeline/new launches will drive steady growth in India and RoW markets.

• Delay in key abbreviated new drug application approvals and escalation to [Form] 483s in the Duvvada unit are key risks.

• In the near term, the company will look for export opportunity in countries with lower level of vaccination.

• Maintains ‘buy’ with a target price of Rs 5,644 apiece, implying an upside of 21%.

• In the near to medium term, Dr. Reddy's is well poised to drive growth across business segments.

• India and emerging markets should grow in high single digits to low teens.

• Covid products aided emerging markets performance this quarter, but the base business growth was strong too.

• North America, the single-largest segment, will also benefit from high-value launches.

• Expects North America sales to remain on a positive trajectory, but growth rates may decline.

• China can be the surprise element. Dr. Reddy's is the only Indian company to have executed approvals under the Quality Consistency Evaluation criteria in China.

• Dr. Reddy's has launched less than 10 products in China and expects to launch more than 15 products in the future.

• Sputnik vaccine exports did not contribute in first half of FY22, but can be an opportunity in second half of FY22.

• The company has a voluntary license to sell Molnupiravir in low middle income countries, which could as well be a meaningful

  growth avenue for emerging markets business (fourth quarter FY22 onwards).

• The licensing income received in the quarter is non-recurring in nature on a quarterly basis but it is recurring on an annual basis.