>Dreddy(MorganStanley)

Investment conclusion: We are upgrading DRL to
Overweight. Increasingly, we believe the risk to
F10-11e EPS is diminishing in view of niche and longer
term (quality) opportunities in the US and weak INR (vs
US$ and €). P/E multiples will likely expand in view of
the earnings growth and, possibly, better visibility of IP
intensive portfolio (bio-similars, derma and NDDS). The
stock is down 40% over the last nine months.
Near-term challenges remain. Depreciation in the
Russian ruble (20% YTD), AOK tender driven erosion in
German business (possibly from June’09), flat sales in
India formulations (for next two quarters), and disclosure
of forex losses/goodwill impairment (in F4Q09 results)
are the most pressing issues.
Stock price trajectory, therefore, will be checkered.
Bad news will likely come first (F4Q09 results in May),
and good news thereafter – omeprazole OTC approval
(3-6 months), 2 bio-similar launch, fondaparinux launch
(12 months), recovery in domestic growth (6-9 months).
We would be buyers of the stock on declines.
In particular, we see continuity in lucrative
opportunities for the US market. – Imitrex (till Aug ’09),
omeprazole (F2H10), fonda (F11), rivastigmine,
desloratadine (F12) plus 1-2 additional niche products
every year in F10-14. DRL has 69 pending ANDAs, of
which 32 are Para IVs and 19 ftfs ($9 bln brand value).
Unsung bio-similar efforts. With a focus on
monoclonal anti-bodies, DRL could emerge as the key
player in this segment, with end to end capabilities in
India, we believe. Generic Rituxan is already launched,
and a couple of such launches targeted for F10.

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