MOSL: DR REDDY’ S LABS (Neutral)-Revenue largely in-line-key product approvals delayed

Dr Reddy’ s Labs: Revenue largely in-line; key product approvals delayed

(DRRD IN, Mkt Cap USD6.5b, CMP INR2504, TP INR2575, 3% Upside, Neutral)

• Weak operating performance: Net sales grew 3% YoY to ~INR38.1b (our estimate: INR36.6b). Gross margin shrunk 280bp YoY (+300bp QoQ) to 56.3%. Sequential improvement in the gross margin is attributed to a better product mix and income of ~INR1.3b from proprietary products. EBITDA margin stood at ~20.1% in 3QFY18 v/s 23% in 3QFY17 and ~18.7% in 2QFY18. PAT for the quarter declined 29% YoY to INR3.3b, impacted by one-time charge of INR930m under tax expense on the back of the enactment of ‘Tax Cuts and Jobs Acts of 2017’ in the US.
• US recovered sequentially; India recovery was below expectations: US business grew 12% QoQ, but declined 3% YoY to INR16b (~USD245m). Sequential increase in revenue was driven by Renvela launch and ramp-up of Doxil sales. India business grew ~3% YoY. Normalizing for GST transition-related adjustment, domestic growth was ~11% YoY. Revenue from emerging markets increased 7.3%, led by ~9.7% growth in Russia, while the CIS segment remained flat. ROW markets declined ~19% YoY. Russia business grew 5% in constant currency terms.
• Key launches to drive US recovery: We expect double-digit price erosion in US base business in FY18/19 due to the impact of further channel consolidation and intensifying competition in key products, including Dacogen, Vidaza, Toprol XL and Fondaparinux. Despite this, we expect US business to bounce back in FY19 (US sales of ~USD930m in FY18E and ~USD1.15b in FY19E). Recent niche product approvals (e.g. Renvela, Vytorin, and Doxil) and upcoming launches (e.g. Suboxone, Aloxi, Nuvaring and Copaxone) will help drive sales growth until FY19.