>DR REDDY (CITI)

Buy: Leveraging Its Product Portfolio

■ Strategic alliance with GSK — DRL has entered into a strategic alliance with GSK for emerging markets. We believe this is positive as it allows DRL to leverage its product portfolio much better without spreading itself too thin at the front end. While details on size, revenue sharing, etc. remain unclear, we believe it could be significant. We expect no material impact in FY10, but benefits should start kicking in from the next fiscal & scale up over the years.

■ Key elements of the deal — a) Effective immediately, GSK gains access to DRL's current portfolio & future pipeline of branded formulations. Key therapeutic areas include CVS, oncology, diabetes, gastro & pain mgmt; b) Covers various emerging markets such as Africa, Middle East, LatAm & AsiaPac ex India; c) The products will be developed & manufactured by DRL and licensed to GSK, which will file registrations & distribute them in the chosen markets. In certain markets, DRL & GSK will co-market the products; d) Revenues will be recorded by GSK & shared with DRL as per agreed terms.

■ In-line with long-term strategy — The move ties in with DRL's recent announcement that it would focus on fewer markets in terms of a front-end presence. Most of the markets covered are ones where DRL's presence is negligible. We believe these markets could cumulatively be as big, if not bigger than, some of DRL's key markets over the medium to long term. On the other hand, GSK has already expressed its intent to scale up in these markets & is a strong partner, given its robust brand equity & distribution strength.

■ Financial impact — Given the partnership model, we expect profitability on revenues under this arrangement to be lower than DRL's own branded business. However, it would drive higher absolute profit with little incremental investment, implying plying better RoI. Maintain Buy.

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