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Dr. Reddy's Lab - Transformation Journey

Dr. Reddy’s Laboratories (DRL) is India’s second largest pharma company by global revenues. The company was founded in 1984 and is headquartered in Hyderabad, India. DRL has ~20,000 employees, 1,200 scientists, 350 Ph.D. and amazing portfolio. DRL has been known for great science and great R&D.

DRL operates as an integrated pharmaceutical company worldwide. Operates through three segments: Global Generics, Pharmaceutical Services and Active Ingredients (PSAI), and Proprietary Products.

  1. The Global Generics segment manufactures and markets prescription and over-the-counter finished pharmaceutical products that are marketed under a brand name or as a generic finished dosage with therapeutic equivalence to branded formulations; it also engages in the biologics business.
  2. The Pharmaceutical Services and Active Ingredients (PSAI) segment manufactures and markets API and intermediates; it also provides contract research services; and manufactures and sells API and steroids in accordance with the specific customer requirements.
  3. The Proprietary Products segment focuses on the research, development, and manufacture of differentiated formulations for dermatology and neurology therapeutic areas and engages in developing therapies in the fields of oncology and inflammation.

DRL-1

Why muted performance between Fy15 to Fy18?

This is few years ago… When mainstay generics business had started coming under pressure, it led DRL to focus on creating a branded (specialty) portfolio in the US. DRL stepped into an uncharted territory and faced high investments, long gestation periods, and challenges in gaining meaningful market share issues.

At a high level had two main issues in past; one capital allocation and other execution.

Issue #1

  • Was playing high-risk, high-reward type of a strategy prior Fy18
  • Significant capital allocation to United States
  • Was focused on relatively small numbers of assets with complex generics, specialty products and biosimilars
  • Unfortunately, got more of the risk and less of the reward

Issue #2

  • Execution issues
  • some visible (regulatory compliance)
  • some less visible (inefficiencies)

So what changed post Fy18? Strategy.

Smart cos re-evaluate their strategies; so did DRL.

DRL promoters (Reddy and Prasad) hired Erez Israeli in early 2018 as COO and Global Head of Generics & PSAI role. Israeli’s long stint (23 years) with Teva has prepared him well for the job at DRL. Since his joining, DRL has been on transformation journey (almost 2 years now). Erez is promoted to CEO in mid 2019.

Listen Erez’s talk (here) at “38th Annual J.P Morgan Healthcare Conference” dated Jan 14th, 2020 to understand new strategy. Slides here.

New strategy at a high level has been -

  • Create more opportunities, and address more potential space and value with less risk
  • Leverage of countries: If earlier used to develop for the U.S., now has been developing for any/every country potentially in the world. For the same products, co have now, not one market, but more than one market
  • Synergy between the relevant spaces: Going for more spaces, but each one of them has a synergy now. Earlier in API, co had some third-party sales, some back integration, however relatively low level
    Now if co increases the API capabilities, co focuses to get more third-party sales while increasing the backward integration (to safeguard and benefit from the changes in China)
  • Specialty products: Co has good specialty products, but did not have an adequate go-to-market in the United States. Now co gives these products to partners in return of upfront and royalty payments; low risk approach. Indirectly helped to pay all the debt (probably only co specialized in generics that has no debt today)
  • Focus on being more efficient, better execution, get rid of stuff that co should not have been in and change the priorities

Any signs of new strategy yielding positive results?

  1. Top-line: Let’s see DRL top-line through quarterly lens. It indicates DRL has turned the table - from degrowth to growth, across all markets. What if this is just the beginning…



  1. Earnings: Despite the price erosion in United States, DRL’s margins are getting better in last 2 years. Achieved primarily by focusing on cost and by clocking growth in all market. EBIDTA margin was 17% in Fy18; improved to >25% in Fy20 (excluding impairment charges).

  2. Legacy quality issues (remediation of Warning letters): Successfully resolved (in 2020) the warning letters issued (in 2015) to Srikakulam API plant, Miryalaguda API plant and Duvvada Oncology formulation plants. DRL now has satisfactory USFDA audit closures across all the three facilities.

  3. Divest nonstrategic assets: DRL out-licensed its three specialty dermatology products — Sernivo Spray, Promiseb Topical cream, and Trianex in the US to Encore Dermatology in 2019. Later out-licensed two specialty neurology (migraine) drug assets, Zembrace and Tosymra, to Upsher-Smith Laboratories.

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North America (veteran space):

  • Has basket of ~300 cumulative ANDA fillings
  • 97 pending ANDAs and 2 NDAs
  • 54 Para IV filings and 30 expected to have FTF status (very exciting portfolio)
  • More than two-thirds of portfolio is ranked ‘TOP 3’ in market share in respective molecule markets
  • Launched 28 products in Fy20
  • New launch intensity is likely to remain at ~25 products in Fy21
  • Market share gain in key products: gSuboxone (20% MS; can fetch $100m in Fy21), gToprol XL (market leader; can fetch $35m in Fy21), gIsotretenoin (relaunched in Fy20; can fetch)
  • Key known US fillings (key growth contributors): gCopaxone, gNuvaring, gRevlimid, gCiprodex, gKuvan, gVascepa, etc

Europe:

  • Launched 40 products in Fy20 (24% of 168 total launches in Fy20)
  • Europe sales grew 49% YoY in Fy20
  • Strength in core markets like Germany
  • Ramp-up of new markets like France, Italy, Spain and new launches
  • With clear focus on leveraging the US injectable portfolio, co expects growth momentum in Europe to stay strong

Emerging Markets (Russia + CISR + RoW):

  • Launched 80 products in EM in Fy20 (48% of 168 total launches in Fy20)
  • Russia is the key market for DRL and accounts for ~51% of the DRL EM sales
  • Most of EM sales are based on hospital products; DRL is well positioned to be the solution for the unmet need because some of these markets are not being served well
  • China: DRL is the largest foreign generic company in China, been there for the last 20 years, selling about $100 million, about 10 products. DRL never left China even when it was hard. The benefit will come because on this infrastructure, given the new regulation and especially the introduction of the GA regulation. 70 products of U.S. portfolio can fit the GA requirement of China. Most of it are already in the stages of registrations, and some it even going to be launched soon

India:

  • DRL is India’s 2nd largest pharma co by global revenues, however not in top 10 by domestic revenues!!!
  • Domestic sales is a focus area now; change in priority under new leadership
  • Very decent domestic growth scope considering DRL size and offerings
  • Domestic MAT sales growing far ahead of IPM over the past ~24 months
  • 6 biosimilars in India and more will come



DRL-8

India - Acquisition of select Wockhardt’s branded generics:

  • INR 1850 Cr deal
  • Fy20 (9m) sales of this portfolio are ~377 Cr; was 594 Cr in Fy19 sales
  • Implied valuation 3.8x EV/Sales
  • Portfolio includes 62 brands in multiple therapies such as respiratory, neurology, derma, gastro, pain and vaccines
  • Key brands are Practin, Zedex, Bro-zedex, Tryptomer and Biovac
  • Acquisition is in line with DRL’s renewed focus on branded generic businesses
  • Limited fixed assets, could have high goodwill with amortization of ~15 years

Pharmaceuticals Services and Active Ingredients (PSAI):

  • Filed 98 DMFs (drug master files) worldwide in Fy20, including 10 filings in the US
  • Has total 893 DMFs (US 204, Europe 168, Canada 74, RoW 447) as per Q2Fy19 presentation
  • Historically, the PSAI’s priority was to develop internal ANDAs; third-party sales lacked attention
  • Has invested in expanding capacities in the past 7 years, however the capacity utilization is low
  • Probability of the following three levers of growth likely to play out in PSAI over the next 2-3 years
  1. Growth in pharmaceutical services: DRL has enhanced engagement with innovators to drive the services business. Recently, announced separating the services business into a separate subsidiary under Aurigene. Aurigene is involved in drug discovery, and hence, under Aurigine, the segment is likely to gain greater focus
  2. Leadership in select APIs: Strives to achieve leadership position in 25% of its DMFs through consistent improvement in cost efficiencies
  3. Patent expiry opportunities: Historically, DRL has been an early mover in patent expiry opportunities. Such high-value product-specific opportunities are likely to emerge in 2023-25
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Quality Journey

  • Sites have been approved by regulators from ~20 countries
  • About 40 inspections conducted over a period of last one year
  • Successfully resolved (in 2020) the warning letters issued (in 2015) to two API and one formulation plant; all three site are now determined as VAI
  • Current status of plant follows -

DRL-9

Source: Page 177 of AR here and US FDA Inspection Classification Database Search here

Next 3 years… Can DRL achieve this or better it?

  • High probability of disproportionate future growth driven by operating leverage
  • In next 2-3 years, DRL would be a debt free co generating high free cash flow with >20% RoE in all likelihood

To summarize: Investment thesis is based on timely approvals and slew of launches to support US sales; faster growth in Europe, India, EMs and PSAI segments. Operating leverage to kick-in as total expenditure as a proportion of revenues dips, resulting in higher OPM (conservative 25-26% EBIDTA assumption above) as DRL focuses on cost optimization and profitability by leveraging assets.

Key risks:

  • More impairments (biggest risk), if any
  • Adverse regulatory developments
  • Delays in key product launches
  • Adverse currency movements particularly in EMs
  • Possibility of losing the plot in the long run (in chasing short-term numbers)

Disc: Invested. DRL is relatively new to me. Look forward to learn more together.

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Hi Guys/Gals,

Here’s my attempt to
a) bring everyone on the same page quickly - why the hell are we even looking at a Large Cap (some of my colleagues are asking :grinning:)
b) illustrate how my mind works/reacts on the DRL Transformation underway - my Key Takeaways captured on Page 4 on how we could take this forward.




Look forward to more inputs from those who might be invested/tracking DRL
Disc: Invested. Low familiarity with business - just last 2 months or so. Possibility of blind-sides

We could quickly move to Bearish Viewpoints on DRL - there was a Baron’s Note on DRL - pointed to by @rupaniamit?? Can you work more from that perspective and pick holes in the story? Others feel free to put up your hands or invite a domain expert in.

15 Likes

Thanks for sharing it. @Donald. insightful.

Am pasting pic of AR (Page 5).

Point 6; reading between the line says they are not in deep race to find vaccination and intent to be focused in existing R&D priorities. This is sensible as per me.

Disc: Invested.

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So what is this 1000+ Cr impairment charge in Fy20?

To understand this, here is a relevant extract from the ARs

DRL-11

Additions during the year ended 31 March 2017 primarily consist of -

  • INR 2336 Cr representing the consideration paid to Teva to acquire eight ANDAs in the U.S. These are products divested by Teva as closing of the acquisition of Allergan’s generics business. The products include 1) Buprenorphine HCl/Naloxone HCl Sublingual Film (gSuboxone sublingual film), 2) Ethinyl estradiol/Ethonogestrel Vaginal Ring (gNuvaRing), 3) Ezetimibe/Simvastatin Tablets (gVytorin), 4) Metformin HCl/Saxagliptin ER Tablets (gKombiglyze XR), 5) Tobramycin Inhalation Solution (gTobi), 6) Phentermine HCl/Topiramate ER Capsules (gQsymiaTM), 7) Imiquimod Topical Cream (gZyclara) 3.75% Cream, and 8) Ramelteon Tablets (gRozerem).
  • INR 316 Cr representing the consideration for the acquisition of exclusive US rights for the development and commercialization of a clinical stage oral new chemical entity from XenoPort, Inc.

Subtractions (an impairment charge) during the year ended 31 March 2020 primarily consist of

  • INR 1,114 Cr for the product Ethinyl Estradiol/Ethenogestral vaginal ring (gNuvaring). During the year, there was a launch of both generic and authorized generic versions of the product by competition, thereby reducing the overall potential of DRL future cash flows from this product.
  • INR 439 for products Tobramycin inhalation solution (gTobi), Ramelteon tablets 8 mg (gRozerem), and Imiquimod cream (gZyclara). While the impairment for tobramycin and ramelteon was triggered by adverse market conditions — such as increased competition and reduced selling prices by contestants — the company decided to drop the launch of Imiquimod cream.
  • INR 124 Cr on other products of the GG and PP segment, as the company determined that there was a decrease in the market potential of these products, primarily due to higher than expected price erosion and increased.

Note:

  • Basically, Fy20 impairment charge is mainly related to the 8 ANDAs acquired from Teva in June 2016 at $350 million. The combined sales of the branded versions of the 8 products in the U.S. was approximately $3.5 billion MAT for the most recent 12 months ending in June 2016 according to IMS Health.
  • Impairment charge is an accounting entry; has to pass-through P&L, however does not impact real cash flow as far as I understand (subject matter expert please chime in if correction required).
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Some folks are asking for a screenshot of my Key Takeaways (too small to read without downloading).
So here goes.

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Initially was having a tough time converting prospective Collaborators to the DRL Puzzle, even after Sandip Patel’s super posts above. But as I called a few folks and personally took them through the key Takeaways (for me) …they were ready converts.

How are they planning to take things forward?
The below enhanced Takeaway picture is a direct result of our discussions - courtesy Collaborators.


Hopefully, pretty soon we will see this thread populated from these efforts - underway now!
Feel free to share/invite folks for this current ongoing effort.

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Very well compiled Sandeep.

On the risks side, the key risk to be watched out here is acquisitions. Two large acquisitions in the past that have not gone well for Dr Reddy’s:-

2006 : Dr Reddy’s acquired Betapharm group for c. $570m in all cash deal, which was the 4th largest generics company in Germany at that time. The intent was to expand presence in global generic markets and diversify away from US markets. The deal was funded through mix of accruals and debt (including recourse debt to Dr Reddy’s India and non-recourse debt at German co.).

Almost a year after the acquisition, German government undertook healthcare sector reforms turning an attractive branded generics market in Germany to a predominantly commoditized tender driven business, significantly reducing the drug prices and margins. As a result, by 2010, Dr Reddy’s had written off more than 80% of the acquisition cost. They paid off all the debt (including non-recourse debt raised in Germany) from Dr Reddy’s other cash flows (which speaks about their management integrity!).

Clearly this went wrong but for no fault of theirs and was just bad luck in terms of timing.

2016 : Dr Reddy’s acquired a portfolio of eight Abbreviated New Drug Applications (ANDAs) in the US for $350 million (c. Rs 2300 crs) in cash from Teva. The combined sales of the branded versions of the 8 products in the U.S. was approximately $3.5 billion MAT for the most recent 12 months ending in June 2016 according to IMS Health. These molecules were expected to drive growth in the medium term.

Of this, c. Rs 1340 crs (c.58%) was impaired in FY 20 due to launch of gNuvaring by competition leading to loss of potential cash flows for Dr. Reddy’s.

Acquisition strategy remains a risk for any pharma company and needs to be watched out for (especially if it is a large one). Acquisitions haven’t played well for many other pharma companies as well like Lupin -Gavis, Sun Pharma – Ranbaxy etc.

For Dr Reddy’s with annual cash flow generation of c. Rs 2,000-3,000 crs, this risk again becomes center-stage. Though the new Executive Management can be expected to certainly be more cautious and twice shy (also evident in their stated strategy of – “creating more opportunities with less risk”).

On the other side, clearly the new CEO clearly has brought transformational changes here evident in increase in EBITDA margins from 17% in FY 18 to 27% in FY 20 (excl impairments). Even US FDA issues which were pending for 5+ years were finally sorted.

Looking forward from here, appended below are snippets from last few call transcripts which highlight the possible upsides to their business:

1. API Space (Q4 FY 20 Transcript) -

There are certain structural tailwinds also for us, such as opportunities for improving our market share across multiple markets and ramping up relevance in our global API business. Overall, we remain hopeful to continue to grow and emerge as a much stronger company, meeting the expectations of all of our stakeholders.

2. Productivity/Increase in EBITDA margin (Q3 FY 20 transcript):

Question: So firstly, on the cost management. How close are we to sort of achieving the optimal cost structure that you would have desired?

Answer: I cannot quantify these numbers, but there is still a lot of room to be better. The goal is to be the most efficient company on earth in our space, and we are very far from there. So, we will continue to see these efforts also going forward.

Question: Okay. And just in terms of your commentary in some of your calls where you said that the ideal metrics that you want to target is a 25% EBITDA with a 25% ROCE. Do you think that’s something which is achievable over the next 2, 3 years? Or you would target that for the next year itself? How would you think about that goal?

Answer: We achieved already for this quarter, 24.5% on the EBITDA overall. So we are very close and I believe that it’s achievable. And I believe that it’s achievable basically not just as overall, but it’s relevant actually for every activity that we want to do which means that the average can be even higher in the future.

Question: You expect this EBITDA margin to expand substantially over next 2-year period?

Answer : I believe that we can do much better on the EBITDA. Yes, absolutely.

3. Capacity utilisation (Q3 FY 20 transcript)

Today, as we told that there are some assets in our networks, which is quite underutilized. But overall, utilization level is also something when we can do much more with the current level of investment or our network that we have created.

If they deliver on the above lines, this could give further impetus to the projections given above (through increase in margins).

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Appended below is summary of conversation with an industry expert on various pharma divisions.

US Generics market

  1. There aren’t too many patents coming for expiry before 2022/23. And therefore, the key to success would be how the generic companies manage within the existing molecules. (Probe further: need to find which are these molecules)
  2. In general, generic companies are focusing on smaller size (instead of larger size which have high competition) and lesser number of molecules (than earlier) to retain focus – so that they can garner higher market share in the selected molecules. This focus is helping in lower costs and higher margins. Many companies (especially big pharma) are also moving out of low margin products which is helping in overall pricing and has resulted in lower pricing erosion lately.
  3. Key factors which help a company excel in this space are:
    a. Selection of molecule
    b. Marketing knowledge and infrastructure in US
    c. Nimble supply chain
    d. Regulatory compliance
  4. Companies doing well in this space are
    a. Alembic: They have the right talent in US & Europe which gives them the right marketing knowledge – which molecule to launch and when? Abilify, Sartans etc.
    b. Dr Reddy’s: New CEO has extensive product knowledge from his Teva experience which is helping them push the right product at the right time. Also, hired external talent in US. They are selling both directly and through partner.

ARVs

  1. There was some news that the Global funds supported programs like malaria, TB and AIDS are getting effected due to diversion of funds toward Covid, and thus could hurt Indian ARV players like Laurus, Cipla, Ajanta, Aurobindo etc. He clarified this isn’t true and they haven’t seen thus far any of this playing out. Laurus will do well in this space as they have already won a lot of tenders. They can potentially double their formulations turnover in the next 2 years – From c. Rs 100 crs in FY 19 to c. Rs 800 crs in FY 20 to c. Rs 1,600 crs in next 2-3.0 years (once capacity comes in). In addition, new ANDAs and contract manufacturing business also expected to do well for them.
    (Probe further: Why Laurus in particular is doing well in this space?)

API space

  1. China factor has been playing out for last 2 years – due to irregularity in supply due to environment shutdowns and product quality issues like sartans.
  2. MNCs are (a) getting out of API space and are (b) Nervous about dealing with Chinese cos and - this can be a good space for Indian companies.
  3. Larger Indian companies are using the API capacity where available, or outsourcing the same to smaller API cos by providing the necessary raw materials, technology etc - thereby ensuring regular supply.
  4. There is also a trend of Chinese cos putting equity into smaller Indian API companies wherein they supply the intermediaries and source back the APIs back to China. (Probe: which ones?)
  5. Dependence upon China for KSMs can reduce slightly but overall will continue.
  6. Similarly, US dependence upon China and India will continue. It is not feasible to shift to manufacturing to US at a large scale. Significant additional costs are involved.

Contract Manufacturing

  1. This is a very big space for India where Indian companies are increasingly taking market share away from their global counterparts.
  2. Key differentiating factor here is cost, execution and customer network.
  3. Syngene, Sai Life (private Hyd based co.), Divis and Laurus seem to be well placed in this space.

All in all, pharma expected to do very well over next 2-3 years with all spaces expected to grow – API, US generics, Contract mfg.

Separately, summary of Dr. Reddy’s launches YTD CY 20. It seems to give a sense of few differentiated launches with limited no. of players:

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Good results by Dr Reddy’s.

INR mio Q1 FY 20 Q4 FY 20 Q1 FY 19 FY 20
Revenues 44,175 44,318 38,435 1,74,600
Gross profit 24,755 22,808 19,859 94,009
Other operating income 118 168 302 833
Other one off income 3,457 3,457
SG&A Exp 12,786 12,177 12,065 50,129
R&D 3,980 4,190 3,609 15,410
Impairment (one off) - 7 - 16,767
Operating income 8,107 6,602 7,944 15,993
Net fin income/(cost) 605 435 393 1,478
Share of profit of equity accounted investees 77 105 163 561
PBT 8,789 7,142 8,500 18,032
Tax 2,996 -500 1,872 -1,466
PAT 5,793 7,642 6,628 19,498
Operating income excl one offs 8,107 6,609 4,487 29,303
Yoy growth 81%

Conference call today 5.30 pm, details below.

Segment wise revenue and gross profit - significant growth in API segment

Segment revenue Q1 FY 20 Q4 FY 20 Q1 FY 19 FY 20
Pharma services & APIs 10,090 8,673 5,933 31,657
Generics 35,075 36,398 32,982 1,38,123
Proprietary products 56 2 281 7,949
Others 491 723 633 2,781
Total 45,712 45,796 39,829 1,80,510
Less: Inter segment revenue 1,537 1,478 1,394 5,910
Net revenue 44,175 44,318 38,435 1,74,600
Segment results-Gross profit Q1 FY 20 Q4 FY 20 Q1 FY 19 FY 20
Pharma services & APIs 2,856 2,043 325 6,190
Generics 21,526 20,332 19,007 78,449
Proprietary products 56 -7 207 7,744
Others 317 440 320 1,626
Total 24,755 22,808 19,859 94,009
Less: Inter segment revenue 15,966 15,666 11,359 75,977
Net revenue 8,789 7,142 8,500 18,032

Conference call
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Q1Fy21 conf call notes -

North America Generics

  • Recorded sales of $229 million for the quarter; decline by 2% YoY and 8% QoQ. In INR terms sales grew 6% YoY.
  • Sequential decline was largely due to forward buying in previous quarter, reduction in new prescriptions, drop in footfalls for new retail stores and the reduction in elective procedures in the hospitals
  • Launched 6 new products during this quarter, including Abiraterone acetate tablets, and Colchicine tablets.
  • On track to launch more than 25 new products in this fiscal, including some niche and limited competition products
  • U.S. generic pricing trend stable
  • Submitted the CRL for gCopaxone; still working on the CRL for gNuvaRing

Europe

  • Recorded sales of EUR 43 million with a strong 38% growth YoY and a decline of 1% QoQ
  • Growth was seen across market and was driven by improvement in both base business and new product launches
  • Launched 7 products in Germany, 2 products each in the U.K. and Spain, 4 products in Italy and 1 product in France

Emerging markets

  • Recorded sales of INR 798 crore with 9% YoY growth and 1% QoQ decline
  • The Russia business declined by 15% in constant currency, both on YoY and QoQ basis
  • The decline was primarily due to covid-19 related lock-downs, resulting in overall reduction in demand
  • Witnessed mixed patterns of sales performance; China, Vietnam, Myanmar and Kazakhstan among the markets that performed well this quarter
  • Launched 29 new products across emerging markets
  • Due to lock-down, the markets that are more related to hospital demand or government tenders did better than those that are patient-doctor interaction dependent like Russia (and India)

India

  • Recorded sales of INR 626 crores with a 10% decline YoY and 8% decline QoQ
  • Negatively impacted owing to reduction in doctor-patient interactions and prescription generation as a result of the covid-19 related lockdown
  • Expect the sales trend to sequentially improve from this quarter onward
  • Launched 4 new products
  • Preparing to launch both Avigan tabs and Remdesivir injection in India in the next few weeks
  • Placed at market rank of twelve position on MAT June '20 basis, an improvement by 1 position after Wockhardt integration

PSAI (API)

  • Recorded sales of USD 113 million, with a strong growth of 74% YoY
  • Improvement in order book across markets
  • Expect this business to positively benefit as companies globally look for strategic and reliable partner for supply of active ingredients
  • See a very healthy growth of the business; attribute it to the decision made 2 years ago to focus on the API
  • Indeed, there was certain traction that came. This is way co normally do. We try to see those areas or those opportunities in which cos (customers) do not have or have one supplier or maybe want to de-risk certain products and then we try to qualify as alternate source
  • Will have more and more molecules (API) which will have two type of contribution to strategy - i) gain more market share as we become more efficient and ii) better integration to help continue improve gross margin
  • Believes that we can have even bigger base in the future and very confident about ability to grow API business. All the trends (i.e. productivity, customers and de-risking supplies) are sustainable

R&D

  • Continue to strengthen pipeline
  • Filed 18 formulation products across global markets, including 5 ANDAs in the United States.
  • As of 30th of June 2020, we have 101 filings pending for approval within the USFDA, including 99 ANDAs and 2 505(b)(2) NDAs.
  • Also filed 16 master files globally, including 1 filing made in the U.S. market
  • Also working on a few molecules related to Covid-19

Proprietary products business

  • Following the recent approval of oral liquid formulation Elixir, co recently secured the approval of DRL’s first NCE under 505(b)(1) pathway
  • Actively working to commercialize both
  • Making good progress in building and advancing a strong pipeline of high-value, globally relevant assets
  • Continuing efforts to monetize select assets to partnership and licensing transaction that maximize their value
  • On biologics front, the Phase III trial for Rituximab is progressing well
  • In parallel, working on the next wave of biosimilar products, which are at different stages of development

New regulations in U.S. (recent norms, which U.S. president has been talking about)

  • In the U.S., you’ve two points - i) pricing and ii) localization of products
  • On the pricing part, do not envision a big impact on DRL on both short and long term
  • Actually believe that a companies like DRL are solution for that as we are providing access to affordable medicines. And also the structures that arise from that, has certain opportunity to increase access for generics even further. So in this respect, no major concerns.
  • Believe it will be more impact for the cos doing innovative products in the United States.
  • On the localization piece, we are actually looking at this situation, we appreciate that there is a certain need to produce certain products in the U.S. At the same time, it’s unclear what will be the mode of payment or the pricing of those. So as it will fold out, we will evaluate it. But at this stage, we will not take any specific action.

Tax-Rate

  • Effective tax rate for the quarter is at 34.1%
  • Guidance of 25% to 27% for the full year
  • Have quite a bit of MAT credit available in book; post utilizing it will switch to new tax rule

Wockhardt

  • Successfully completed acquisitions of select business from Wockhardt
  • Revising these brands
  • Integrated the business acquired from Wockhardt and registered sales for 20 days in Q1Fy21

M&A opportunities

  • Co generated strong free cash flow of INR 925 Cr in Q1Fy21 before payout for business acquisition for Wockhardt
  • Next quarter, will go back to surplus of cash. Lot of financial capacities, which means potentially can risk up to a 2x EBITDA
  • Looking primarily in India; likes Wockhardt type of a deal where have to get the assets and integrate relatively fast into the business

Covid-19

  • Executed the licensing deals for 2 key products related to covid-19 treatment, Avigan or Favipiravir tablets and Remdesivir injections
  • Actively working towards launching these products to catering to patients in various markets
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Big news for Dr Reddy’s……they have settled their litigation with Celgene, a wholly owned subsidiary of Bristol Myres Squibb related to Revlimid .

Revlimid is a very large drug with sales of $6.47bn in 2018, $10.82bn in 2019 and $12bn in 2020

(Reference links below:


https://www.fiercepharma.com/special-report/top-20-drugs-by-2018-u-s-sales)

Under the deal, Dr Reddy’s gets a license to sell volume limited amounts (% is confidential) of the generic version beginning on a date after March 2022 and sell without volume limitation beginning 31.01.26 (both subject to regulatory approval).

Source: https://www.bseindia.com/xml-data/corpfiling/AttachLive/ea5a0635-b7ff-4678-a0f6-b0b1914655dc.pdf

Cheers
Yachna

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Dr.Reddy lab launches a generic version of Kuvan(sapropterin dihydrochloride) used in treatment of Phenylketonuria.

Phenylketonuria(PKU) is an inherited disorder of amino acid(phenylalanine) metabolism with frequency of 1:10,000. Most newborns in the US, Europe and Australia are screened to diagnose early and treatment to be continued for life long.

Kuvan(sapropterin dihydrochloride) used in conjunction with Phenylalanine restricted diet in patients with PKU. BioMarin got US FDA approval for Kuvan in 2007 which is the first specific drug therapy for PKU.

Global sales of Kuvan was $489 million for 12 months ended June 2020. (source:https://www.prnewswire.com/news-releases/endo-begins-shipment-of-generic-kuvan-tablets-and-powder-for-oral-solution-sapropterin-dihydrochloride-301144510.html)

Par pharma (subsidiary of Endo pharma) has launched both oral and powder form for oral solution, Dr Reddy launched an oral tablet at 100 mg strength.

It must be a limited competition drug without much price erosion in near future as the US FDA orange book doesn’t show any other company name except innovator Biomarin and Par pharma. ( I can’t even see Dr Reddy lab name here. I must be missing something)


Discl: tracking quantity

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Dr. Reddy’s to release Q2 FY 21 results on October 28th, 2020, Earnings call slated for October 28th @ 5:30 PM IST / 8:00 AM EDT.

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RDIF has tied up with a number of Indian manufacturers to produce the vaccine . These include Hyderabad based Dr Reddy’s Laboratories, Hetero Biopharma, Gland Pharma, Stelis Biopharma and Vichrow Biotech for the production of vaccine doses.

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I am adding some of my observations of DRL numbers over the last 12-years which covers atleast 1 full business cycle.

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 GROWTH (FY09-21)
Consolidated revenue 6’944.00 7’028.00 7’469.00 9’674.00 11’627.00 13’217.00 14’819.00 15’471.00 14’081.00 14’203.00 15’385.00 17’460.00 18’972.00 8.74%
US revenues (cr.) 1’984.00 1’682.00 1’900.00 3’189.00 3’785.00 5’530.00 6’472.00 7’545.00 6’360.00 5’982.00 5’996.00 6’466.00 7’049.00 11.14%
Germany revenue (cr.) 985.00 730.00 546.00 507.78 772.00 697.00 719.00 770.00 761.00 822.00 787.00 721.00 1’540.00 2.18%
Europe - Germany (cr.) 204.00 234.00 297.00 318.22 450.00
India 848.00 1’016.00 1’169.00 1’293.00 1’456.00 1’571.00 1’787.00 2’129.00 2’313.00 2’332.00 2’618.00 2’895.00 3’342.00 12.11%
Russia 580.00 723.00 894.00 1’102.00 1’405.00 1’633.00 1’492.00 1’064.00 1’155.00 1’261.00 1’530.00 1’690.00 1’580.00 8.71%
CIS 182.00 189.00 192.00 224.00 286.00 349.00 279.00 354.00 369.00 1’005.00 524.00 647.00 740.00 12.40%
ROW 196.00 390.00 553.00 736.00 1’306.00 942.00 583.00 835.00 944.00 1’180.00 16.14%
Pharmaceutical Services & Active Ingredients 1’876.00 2’040.00 1’965.00 2’381.00 3’070.00 2’397.00 2’546.00 2’238.00 2’128.00 2’199.00 2’414.00 2’575.00 3’198.00 4.55%
Others 89.00 269.00 300.00 304.00 218.00 429.00 412.00 602.00 681.00 1’072.00 343.00 11.90%

Consolidated sales have grown at 8.74% in the last 12-years, with ROW sales registering the highest growth (16.14%) and Europe registering the lowest growth (2.18%) followed by the PSAI segment (4.55% growth).

US business
DRL’s sales stagnated at ~1900 cr. in FY09-11 which was followed by the acquisition of GlaxoSmithkline’s penicillin facility in US along with rights for certain brands. This was followed by new product launches from this facility which catapaulted US revenues to 3189 cr. in FY12. The penicillin facility was recent sold to Neopharma (link). This was followed by a golden phase for DRL and other generic pharma companies, where DRL’s US sales surged from 1’900 cr. in FY11 to 7’545 cr. in FY16. FY21 US sales of 7049 cr. are still below the peak sales of FY16.

European business
The last time when DRL was growing strongly in EU was in the 2009 timeframe when Germany contributed 985 cr. to their sales. Following this, Germany de-grew drastically to 508 cr. in the next 3-years because of strong competition in the tender-driven German market. This was followed by a period of stagnation in European sales, between 700-800 cr. until FY19. Since then, EU has started growing (led by recovery in German sales + penetration in other markets (UK, France, Italy and Spain)). FY21 EU sales were ~1540 cr. (CAGR growth of 2.2% over the last 12-years).

India business
Indian sales have grown by 12% from 848 cr. in FY09 to 3’342 cr. in FY21. DRL started selling biosimilars in India around 2008, which grew very quickly from 32 cr. in FY09 to 113 cr. in FY14. Since then, they have not been sharing biosimilar sales in India in their presentations.

Russia and CIS (plus Romania)
DRL has been very successful in Russian and CISR markets, growing from 762 cr. in FY09 to 2320 cr. in FY21 (9.7% CAGR). Russian sales was badly affected in FY16 (degrowing from 1’492 cr. in FY15 to 1’064 cr. in FY16) due to devaluation of ruble. However, volumes were not impacted.

ROW
Rest of the world market has grown fastest from 196 cr. in FY09 to 1180 cr. in FY20 (16.14% growth).

Margins
Gross margins have largely varied between 52-60%, average being 54.8%. DRL’s generic business makes higher gross margin (60%+) whereas the PSAI segment makes lower margins (20-25%). SG&A costs have largely varied from 28-32% yielding EBITDA margins of 15-25%.

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Gross margins 53.00% 52.00% 54.00% 55.00% 52.10% 57.35% 57.63% 59.60% 56.00% 53.70% 54.20% 53.80% 54.30%
SG&A costs 30.00% 32.00% 32.00% 30.00% 29.50% 29.34% 28.74% 33.00% 31.80% 28.70% 28.76%
R&D % of sales 6.00% 5.00% 7.00% 6.00% 6.60% 9.38% 11.77% 11.50% 13.90% 12.90% 10.10% 8.80% 8.70%

R&D costs
R&D used to be 5-7% of sales until FY13 which was then increased to 13% levels due to DRL’s forey into complex generics, new drug applications and biosimilar program. R&D has recently come down to 8.7% of sales. In complex generics, DRL has concentrated on biosimilars (for emerging markets), opthalmology, dermatology, complex and controlled substances for the US market (IQVIA report).

Disclosure: No investments as on date

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Market Movers: Why Dr Reddy’s fell & took other drug stocks down with it

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