Wednesday, June 13, 2012

>Dr Reddy's- Merck Serono biologic partnership

The deal contours present right balance between risks and rewards

Action: Dr Reddy's partnership with Merck Serono is strategically positive
We believe the deal catapults Dr Reddy's as a global player in biosimilars. We believe the partnership provides Dr Reddy's with: a) Merck Serono's development, manufacturing and commercial expertise across markets; b)financial support that can expedite some of Dr Reddy’s development programmes; c) the option of an efficient integrated worldwide product development; d) lower risks as investments in R&D, manufacturing and sales force are lowered and e) reasonable upsides as it gets to keep a share of profits in the most lucrative US market and certain branded markets like India and Russia. We think the deal may not have resulted in any immediate value discovery as there are no upfront and milestone payments disclosed. But the partnership, we believe, is the right strategic move and the deal has struck a right balance between risks and rewards.

Catalyst: Biosimilar remains an interesting opportunity
The deal appears well timed, as some clarity on regulatory pathways has begun to emerge in its developed markets of the US and Europe. With biologic drugs of USD100bn+ in sales going off-patent by 2020, we estimate the biosimilar opportunity in developed markets to record ~50% CAGR to reach USD20bn by 2020F. Also, we expect a 3-fold growth in patient volumes in emerging markets by 2020F as affordability increases on lower prices of biosimilars. Dr Reddy's biosimilar revenue of USD25mn (FY12) is <5% of the overall biosimilar market currently, on our reading.

Valuation: Maintain Buy
The deal does not impact our estimates but reduces risk. At 16x FY13F P/E, the valuations appear reasonable. Our TP implies 19% upside.

To read report in detail: DR. REDDY's LABORATORIES