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Ushering into a new era of growth

The Investor Day of Dr Reddy’s unveils a sustainable, affordable, patient-centric and innovation driven vision for their future growth. The global environment is evolving to medical science approaching healthcare needs more holistically. The disruption in global economies and intense competition in traditional generics business offers opportunities to focus on execution priorities like leadership in existing space, operational excellence with continuous improvement and patient focussed innovation. The management has laid down strategic focus in two horizons- (1) Horizon 1 focuses on double digit revenue growth in existing segments (Generics, API, OTC etc.), 25% EBITDA margins and 25% ROCE over the short to medium term; and (2) Horizon 2 envisages scaling up Immuno-oncology NCEs, Nutraceuticals and CDMOs while entering newer avenues like preventive and primary care platform SVAAS, cell gene therapy and disease management over the longer term. The management expects meaningful contribution (c.25% of revenues) from Horizon 2 opportunities by 2027. The diversified revenue mix offers more sustainable earnings visibility over the medium to long term. While the US pipeline remains robust (Refer Exhibit 1&2), Europe and emerging market expansion-driven growth under Horizon 1 is expected to outpace US. Horizon 2 entails 50-100 bps incremental R&D spend (translating to INR 2 bn+ annually) thereby pushing the R&D costs to 10-11% (from c. 8% in FY22). Of this, 25-30% shall be for NCE/biosimilars and >50% is expected to be for global R&D. Dr Reddy’s domestic business is expected to outperform IPM growth by scaling up brands and inorganic play. API business with backward integration in 70%+ molecules is expected to improve gross margins by over 500 bps over the next 5 years. Dr Reddy trades at c.17x FY24 earnings providing an attractive entry point. We value Dr Reddy’s at 25x FY24E earnings deriving a Price Target of INR 5685 (including gRevlimid of INR 200). BUY.

* Key Highlights:

North America: US business has delivered consistent growth in the last 10 out of the 12 quarters bucking industry trends. It has grown at a Revenue CAGR of 5% over FY19-22 to reach USD 1 bn. Key products have seen their market share soar to double digits like gSuboxone (19%), Ciprofloxacin Dexamethasone (43%), Metoprolol ER (25%) and Liposomal Doxorubicin (45%). Dr Reddy’s guides to 20-25 new product launches in FY23. US pipeline remains extremely robust (Refer Exhibit 1&2) with 175+ products (90 filed). The pipeline consists of c.40% injectables/ sterile products, 25+ complex products and advanced stages platform technologies (peptides, microsphere and Liposomal etc.). The company expects gRevlimid launch in the near future. The company guides to lower share of US business to overall revenues going forward. Dr Reddy’s expects Pegfilgrastim launch in US by FY23 and Rituximab filing next year. The management is working on their front end presence in US market for biosimilars post these two initial launches.

India: Domestic business has grown 2x over 4 years and continues to outperform IPM market. Dr Reddy’s has grown at a CAGR of 17% over FY19-22 to INR 42 bn. They have 16 brands in Top 300, 15 brands with INR 1bn+ turnover with an aspiration to be among Top 5 in India (from 10 at present). They also have 6 commercialised biosimilars in India. Horizon 1 strategy is building big brands, inorganic play and increasing productivity using digital and analytics. Horizon 2 moves focus to biosimilars, nutraceuticals (10 products launched), NCE/NBE, condition & disease management and digital ecosystem play. they are expected to start a CGT facility in Bangalore soon. SVAAS has successfully piloted in 7 cities with the aspiration to become leading primary care and condition services management platform.

Europe: Europe business has grown 2x in the last 3 years with 160 commercial products. Horizon 1 strategy is to expand in EU5- Germany, UK, Spain, France and Italy. Horizon 2 is about pioneering in new spaces like pharmaceutical cannabis. The generic and biosimilar pipeline in Europe is equally promising (Refer Exhibit 3).

Emerging Markets: Emerging markets biz has grown 2x in the last 4 years with 11 brands registering over INR 1 bn+ sales. They have filed 564+ products in the last 4 years. While Russia focus remains intact, China and Brazil outlook seems to be promising. With the GPO system in China, Dr Reddy believes it to be a key beneficiary. So far, Dr Reddy’s has filed 17 products and aim to file additional 15 products in FY23. The aim is to sell both injectable as well as oral solids in China. They aspire to become 2-3x in the next 5 years in China and 4-5x in the next 5 years in Brazil.

API: The vision lays special emphasis on API segment with 70%+ core molecules’ backward integration expanding gross margins by over 500 bps in the next 5 years. With 225 active DMFs and 55 products in the pipeline, Dr Reddy’s aims to increase expand geographic reach. They serve 3 out of top 5 innovators and biotech companies globally.

Others: Dr Reddy’s has significantly improved cost efficiencies and productivity. They have reduced 43% manufacturing cost per 1000 pills, 56% increase in factory output and 76% reduction in quality deviations. Dr Reddy’s is driving sales and marketing through digital and analytics which has helped expand town coverage by 2.5x. Other sustainable goals include 100% renewable power by 2030, 25% new launches to be first to market by 2027, 3 innovative products to be filed every year, 100% living wages for extended workforce by 2025 etc.

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