>DR. REDDY'S LABORATORIES (MERRILL LYNCH)

■ Raised PO on high earnings visibility; Reiterate Buy
Raise PO to Rs 1,325 (earlier Rs1,110), to reflect (1) earnings increased by 7% in FY11E, mainly US sales, and (2) higher base business multiple of 18x FY11E EPS (up 9%), in line with sector (presently 15% discount) on stronger business visibility, and anticipated news flows of GSK alliance and bio-similar opportunity.

High visibility boosts confidence; Raise PO

■ Increased confidence on US$3bn sales guidance
Raise earnings based on higher US sales (~28% of FY12E), on revised pace of new launches (15/yr). Despite stronger rupee, we expect ~22% EBITDA margins to sustain on lower SG&A expense and better product mix. Post-revision, we estimate 17% sales CAGR, while management guidance of $3bn sales by FY13 implies 26% sales CAGR (FY10-13E). Our increased confidence of execution ability stems from DRL surpassing guidance in past 2 years.

■ Triggers from niche opportunities
Sales forecasts include (1) generic Fondaparinux (Arixtra, $200mn) in Q1 FY11, but could exceed due to minimal competition over next 2 years, (2) at-risk launch of generic Allegra D24 by end-FY10, where DRL is FTF, and (3) Omeprazole Mg (Prilosec), launched in the OTC market last quarter, but likely ramp up in Q4. Pipeline of 62 ANDAs (16 FTFs) is expected to contribute to $3bn guidance.

■ Key opportunities not factored in estimates
This includes (1) GSK shipments (formulations to RoW markets), which will likely commence in next 2 years, but we expect clarity on this opportunity later this month, and (2) Biosimilar investments achieving results, with 2 products already in India, RoW entry by FY12, regulatory pathway clarity (US mkt) to be next trigger.

■ Q3 result weakness, particularly attractive
We estimate 20% YoY and 29% QoQ decline in profit on absence of exclusive opportunity (as was in previous qtrs), and slower growth in US (an aberration due to FDA audit).We also expect write-down on Betapharm to impact reported profits.

To read the full report: DR. REDDY