MOSL: DR REDDY’ S LABS (Neutral)- Weak performance continues-All eyes on key launches

​Dr Reddy’ s Labs:Weak performance continues; All eyes on key launches

(DRRD IN, Mkt Cap USD6.2b, CMP INR2431, TP INR2576, 6% Upside, Neutral)

• Weak operating performance: Net sales declined 1% YoY to ~INR35.5b (5% miss). Gross margin shrunk 270bp YoY, but improved 170bp QoQ to 53.3%. EBITDA increased 10% YoY (4% miss), as margin expanded 190bp YoY to 18.7%. PAT declined 12% YoY to INR2.8b (18% miss). Despite Doxil and Vytorin launch, US sales remained under pressure at USD220m (v/s USD231m in 1QFY18 and USD245m in 2QFY17.
  
• India recovery below expectations: India business grew ~2% YoY and 36% QoQ. Normalizing for the excise duty impact, domestic growth was ~10% YoY (v/s our expectation of >15%).
  
• Key launches to drive US recovery: We expect double-digit price erosion in the US base business in FY18/19E due to the impact of further channel consolidation, and competition in key products like Dacogen, Vidaza, Toprol XL and Fondaparinux. Despite this, we expect the US business to bounce back in FY19 (US sales of USD930m in FY18E and USD1.15b in FY19E). Recent niche product approvals (including Renvela, Vytorin and Doxil) and upcoming launches (including Suboxone, Aloxi, Nuvaring and Copaxone) will help drive sales growth until FY19.
  
• Key call takeaways: (1) 2nd Copaxone DMF filing will happen in two months (apart from Srikakulam facility). (2) Copaxone TAD is 10th November 2017 for 20mg and March 2018 for 40mg. (3) Duvvada USFDA re-inspection in 4QFY18. (4) Company guided for 2-3 new launches/quarter in US. (5) Tax rate in FY18 to stay at ~23-25%. (6) R&D run-rate to stay at INR5b/quarter in FY18.