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To embark upon Horizon 2 by leveraging on Horizon 1

About the stock: Dr Reddy’s (DRL) portfolio includes pharmaceutical generics, APIs, custom pharmaceutical services, biosimilar and complex formulations

Investor Meet Takeaways: Dr Reddy’s is embarking on the next phase of its strategy in alignment with changing dynamics of industry, emerging opportunities.

* The goal is to leverage Horizon 1 business growth levers and drive productivity to invest in Horizon 2 businesses

* Horizon 1 will be core driver in the short to medium term mainly comprising 1) Generics, 2) API, 3) Branded Generics, 4) OTC and 5) Biosimilars

* Horizon 2 is earmarked for long term mainly comprising 1) ImmunoOncology NCEs, 2) Biologics & CGT, 3) Nutraceuticals, 4) CDMO (small and large molecules), 5) Disease management, 6) D2C and 7) Digital services

* The company aspires to 1) maintain double digit sales growth, 2) 25% EBITDA margin profile and 3) 25% RoCE, while keep investing in Horizon 2

What should investors do? Dr Reddy’s share price grew ~1.7x in past three years.

* We maintain BUY as the so called transition to Horizon-2, although directional, provides well thought out strategy for the next five years

Target Price and Valuation: We value Dr Reddy’s at | 4960 i.e. 22x FY24E EPS of | 218 + NPV of | 163.4 for gRevlimid.

Key triggers for future price performance:

* US: Focus on remunerative portfolio with 1) 40% of pipeline being injectable/sterile, 2) 25+ complex products and 3) select Biosimilars and Complex generics earmarked for US launch

* Europe: Building scale in select countries while leveraging existing portfolio to do first-to-market launches. Increased focus on Biosimilars, complex generics and high value generics launches from global staple

* India: 1) Scaling up existing brands, 2) creating differentiated portfolio by both organic & inorganic means and 3) Diving productivity by data analytics

* Emerging Markets: DRL is leveraging its existing portfolio in other geographies and seeks growth in Rx and OTC. It is targeting GPO tenders in China and has 17 filings pending for approval, FY23 target of 15

* API: 1) Backward integrating 70% molecules to benefit gross margins, 2) value added API offerings for B2B sales and 3) focused approach in Discovery and CDMO services to biotech and originator companies

Alternate Stock Idea: Apart from Dr Reddy’s, in healthcare we like Sun Pharma. ? Higher contribution from specialty and strong domestic franchise is likely to change the product mix towards more remunerative businesses by FY23 ? BUY with a target price of | 1070

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