>Dr. Reddy's Labs: Windfall from generic Zyprexa (olanzapine); DRL launched 33 generic products in the US market

Dr. Reddy’s Labs (DRL) reported excellent results for Q3FY12 due to $99mn(Rs4.55bn) revenues from 180-days exclusivity of generic olanzapine in the US. The company’s revenues grew by 46%YoY, EBIT margin improved by 1190bps and net profit grew by 88%YoY. The company is also likely to report similar results in  Q4FY12 due to generic olanzapine opportunity. However, the company reported moderate growth in other markets. We have revised our rating from Hold to Buy with a revised target price of Rs1885 (based on 24x FY13 EPS+FTF).


■ Windfall from generic olanzapine: During the quarter, DRL reported $99mn (Rs4.55bn) revenues from 180-day exclusivity of generic olanzapine in the US. The company launched 20mg version of generic olanzapine in October’11 in the US. DRL is also likely to report similar growth in Q4FY12 due to the remaining period of exclusivity. Excluding generic olanzapine, the sales growth was 22%. The company is likely to benefit from 40 Para IV and 10 FTF opportunities in the US.


■ Moderate growth in other markets: DRL’s global generic business (77% of revenues) grew by 57%YoY from Rs13.59bn to Rs21.29bn. Its PSAI business (20% of revenues) grew by 12%YoY from Rs4.98bn to Rs5.56bn. DRL’s proprietary business (3% of revenues) grew by 102%YoY from Rs417mn to Rs842mn. Global generic growth rates in various geographies were: N. America 133% (due to generic olanzapine), Europe 14%, India 11%, Russia & CIS 15% and others 34%. For PSAI business the growth rates were: N. America 52%, Europe -10%, India 39% and others 7%.


■ EBIT margin improves by 1190bps: DRL reported 1190 bps YoY improvement in EBIT margin from 15.4% to 27.3% mainly due to the high margin generic olanzapine opportunity in the US.


■ New product launches: During Q3FY12, DRL launched 33 generic products in the US market. The company filed 7 DMFs and 16 ANDAs with US FDA. The company has one of the richest pipelines of ANDAs. It has a total of 187 ANDA filings, 79 pending ANDAs with US FDA of which 40 are Para IV and 10 FTF opportunities. DRL had strong volume growth across key products namely lansoprazole, tacrolimus, omeprazole Mg OTC in the US market. The company’s 26 products feature among the top 3 in MS in the US.


■ Mexico facility still under US FDA scanner: DRL’s API facility at Mexico continues to be under US FDA scanner and awaiting re-inspection by US FDA.


■ Upgrade from Hold to Buy: We have revised our EPS estimates upwards for FY12 and for FY13 by 32% and 17% respectively due to higher sales of generic olanzapine. We expect the company to benefit from the good growth of generic olanzapine in US in Q4FY12 and from 40 Para IV and 10 FTF opportunities in the US. At the CMP of Rs1670, the stock trades at 18.4x FY12E EPS of Rs90.5 and 18.6x FY13E EPS of Rs89.9. We have revised our rating from Hold to Buy with a target price of Rs1885 (based on 24x FY13E EPS+FTF).


RISH TRADER