An Interesting Emerging Market ADR
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Dr. Reddy’s Laboratories (NYSE: RDY) is an India-based integrated global pharmaceutical company. RDY is one of the largest pharmaceutical companies in India, with revenue of $2 billion in FY 2012. The company focuses on three core businesses; Pharmaceutical Services and Active Ingredients, Global Generics, and Proprietary Products.
Pharmaceutical Services & Active Ingredients (PSAI)
Through the PSAI unit, RDY offers speedy product development with IP advantages, as well as cost effective and robust manufacturing services to its customers, which include generic companies and innovators.
The Active Pharmaceutical Ingredients business within the PSAI unit enables RDY’s generics customers to be the first to launch a generic product by leveraging on its IP strengths. The Customer Pharmaceutical Services business, meanwhile, provides services to several innovators, which include major pharma companies as well as emerging biotechnology companies.
In FY 2012, the unit accounted for 25% of RDY’s total revenue.
Dr. Reddy’s Global Generics unit is focused on serving millions around the world, giving them access to medicines previously unaffordable. RDY’s branded generics in doctor-driven markets and unbranded generic products in distribution-driven markets provide lower-cost alternatives to highly-priced innovator brands. RDY, through its partnerships with GlaxoSmithKline (NYSE: GSK), serves many emerging markets.
In FY 2012, the unit accounted for 75% of RDY’s total revenue. The unit’s strategic focus is on key large markets, which include North America, India, Russia/CIS and Europe.
RDY’s Proprietary Products unit includes New Chemical Entities (NCEs), Biosimilars and Differentiated Formulations. The NCE business focuses on the discovery, development and commercialization of novel small molecule agents to address significant clinical unmet needs. The emerging Differentiated Formulations business is engaged in the development of novel formulations of currently marketed drugs or combinations to improve patient comfort.
Dr. Reddy’s reported its most recent financial results (quarter ended Sept. 30, 2012) last month. For the quarter, the Hyderabad-based company reported consolidated revenue of $544 million, representing a year-over-year increase of 27%.
RDY reported EBITDA of $145 million for the second quarter of fiscal year 2013, up 47% over the same period in the previous year. RDY’s net profit for the second quarter was $77 million, representing an increase of 32% over the same period in the previous year.
At the end of the September quarter, Dr. Reddy’s had $390 million in cash and cash equivalents on its balance sheet.
Below is segment-specific revenue for quarter ended Sept. 30, 2012
This week RDY announced that it launched Sildenafil Tablets (20 mg) in the U.S. market.
Sildenafil is a bioequivalent generic version of REVATIO® tablets. REVATIO is a registered trademark of global pharmaceutical major Pfizer (NYSE: PFE). According to data from IMS Health, the REVATIO brand’s U.S. sales for the most recent twelve month period ended Sept. 30, 2012 stood at $338.67 million. Dr. Reddy’s launched the drug after the U.S. Food and Drug Administration (FDA) approved the company’s ANDA for Sildenafil Tablets.
Last week, Dr. Reddy’s and OctoPlus announced that they entered into a conditional agreement in connection with a planned public offer by Dr. Reddy’s, or a wholly-owned subsidiary of Dr. Reddy’s, for all issued and outstanding ordinary shares of OctoPlus at an offer price of 0.52 euro (cum dividend) in cash for each OctoPlus share.
OctoPlus is a special pharmaceutical company engaged in the development and manufacturing of improved injectable pharmaceuticals based on its proprietary drug delivery technologies. The company is a leading European provider of advanced drug formulation and clinical scale manufacturing services to the pharmaceutical and biotechnology industries. OctoPlus is listed on Euronext Amsterdam.
Addressing Future Growth
Over the last decade, RDY’s revenues have grown on a consistent basis, with a CAGR of 21%. The company outlined its strategy to sustain this growth in FY2013 and beyond in an investor presentation in August this year. The strategy includes steady growth across emerging markets in the next five years and building momentum in U.S. through limited competition opportunities. In the longer-term, the company is focused on continuing its progress in emerging markets, building a strong base business in U.S. and commercializing its proprietary products pipeline.
RDY is currently trading around $31.80, and the company has gained 8.15% year to date. Over the last five years, RDY has returned more than 107%.
RDY currently trades on a P/E (ttm) ratio of 18.10, compared to Israel-based Teva Pharmaceutical’s (NYSE: TEVA) 15.79 and the industry average of 17.92. Reddy’s P/S (ttm) ratio is 2.66, right in the middle of TEVA’s 1.62 and industry average of 2.90.
RDY is reasonably valued at current levels. Given the company’s future growth prospects, RDY is an excellent long-term play.
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