Add Dr Reddy's Laboratories Ltd For Target Rs. 5,350 - Yes Securities
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Focus on renewed US momentum
Our view
Dr Reddy’s inched up on the margin curve though aided by one offs in operating and proprietary income as well Covid drugs boost in emerging markets and India. US rebounded driven by Vascepa and other launches of last quarter. Gross margin would have undergone push and pull between low margin Covid drugs and one-time incomes. Looking ahead, expect Vascepa in H2 and Revlimid to be key drivers and a normalized price erosion in US to be supportive of gross margins. Continued investments in marketing for domestic business should also pay off even as non Covid growth remained strong YoY in Q2. We remain cautious on the Sputnik opportunity given the lack of offtake so far and marginally lower FY22/23 estimates by 5%/1% and retain ADD with unchanged TP based on ~26x FY23 EPS. Key risk would be any sustained price erosion in US beyond Q3 FY22 and lack of traction in key product like Vascepa.
Result Highlights
* Revenue jumped up 18% YoY and ~18% QoQ; US growth up 9% QoQ driven by previous quarter launches + gVascepa. Other op income of Rs1.7bn included income towards sale of anti-cancer agent E7777. Proprietary income surged to Rs1.8bn on recognition of license fees from sale of Celecoxib to BioDelivery Sciences
* India growth robust 25% YoY (ex-Covid 15%) on the back of Covid portfolio that included Sputnik V vaccine and 2-DG. EM growth was at 50% YoY with Russia growing 44% on the back of new launch of biosimilar Bevacizumab. ROW growing 90% mainly driven by new products and COVID portfolio.
* Gross margins lower by 300bps YoY to 65% mainly due to price erosion in US and Europe. EBITDA margins decreased by 163bps YoY at 23.5% despite lower R&D (as % of sales)
Valuations
Marginally lower FY22/23 estimates by 5%/1% and retain ADD with unchanged TP based on ~26x FY23 EPS. Key risk would be any sustained price erosion in US beyond Q3 FY22 and lack of traction in key product like Vascepa.
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