February 15, 2007 (Vol. 27, No. 4)

Revenues Doubled, While Profits and Net Income Tripled in Q3 FY07

Dr. Reddy’s Laboratories (RDY) reported a whopping 160% revenue growth in Q3 FY07 over Q3 FY06, according to its unaudited financial results. In the first nine months of fiscal 2007, which in India runs from April 1 to March 31, G.V. Prasad, CEO, Dr. Reddy’s points out that, “for the first time in the history of Dr. Reddy’s, we have crossed USD 1 billion in revenues. Starting as an API manufacturer addressing the Indian market, over the last 22 years of our journey, Dr. Reddy’s has grown into a vertically integrated global pharmaceutical company with activities spanning the entire pharmaceutical value chain.”

“During fiscal 2007,” notes Jason Napodano, an equity research analyst, in a January 24 posting on Zacks.com, “RDY experienced both top-line and bottom-line growth thanks to many products going off-patent over the past several months. RDY currently has 58 ANDAs filed with the U.S. FDA, which should present future growth opportunities for the company.” Sales of its generic drugs in international markets during Q3 FY07 boosted profits three-fold to $43 million compared to $14M in the same period a year earlier.

Revenues more than doubled to $350M from $134M in Q3 FY06. For the nine month ended FY 07, revenue was $1.1B. A 241% increase in revenues from international markets contributed to the company’s significant growth. This $299M made up 86% of total revenues as against 65% in Q3 FY06. Revenues from core businesses, excluding authorized generics and acquisitions, grew by 38% to $186M.

Net income practically trippled to reach $42.6M from $14.8M, translating into a diluted EPS of $0.26 compared to $0.09. Gross profit margins on total revenues were at 44% as against 51% in Q3 FY06.

Segment Breakdown

While all of Dr. Reddy’s segments—APIs, generic formulations, branded formulations, and custom pharmaceutical services—achieved an increase, its generic formulations business saw the most significant growth. Revenues in this segment were $174.19M in Q3 FY07 as against $18.84M in Q3 FY06.

Dr. Reddy’s December 2006 launch of a generic version of Zofran®, which helps prevent chemo-induced nausea and vomiting, won a 180-day marketing exclusivity. The company captured 55% of the total market and achieved sales of $5M.

Overall sales in North America contributed 60% with an increase to $104.98M in Q3 FY07 from $10.88M. Combined revenues of cholesterol lowering drug simvastatin and benign prostatic hyperplasia drug finasteride were at $76.75M. In Europe revenues grew to $68.82M in Q3 FY07 from $7.86M in Q3 FY06, contributing 40% to the segment.

Revenue from betapharm of Germany, which Dr. Reddy’s acquired in March, 2006, was $60.4M in Q3 FY07 as compared to $57.91M in Q2 FY07. “We believe this acquisition should help RDY establish a strong foothold in Europe, especially Germany, where betapharm was the fourth-largest generic player,” states Napodano. Dr. Reddy’s paid $480M in cash for betapharm, which has a portfolio of about 145 marketed products and had a gross turnover of $164M in 2005. The company expects to double EU sales over the next three years.

It’s API segment grew 29% to $62M, primarily driven by sales of sertraline, according to Dr. Reddy’s. Markets outside India contributed 82%, or $49.88M. This represented a 49% rise in this market segment.

The branded formulations business had an 18% boost to revenues of $72M, driven by growth in India and Russia. Revenues in Russia increased 18% to $21.54M mostly because of enhanced sales from key brands of Nise, Cetrine, and Keterol as well as new candidates on the market. New products launched during the year, totaling 18, contributed $1.6M in revenues in Q3 FY07.

Revenues from the custom pharmaceuticals services business grew to $36M from $2M in Q3 FY06. The acquisition of Roche’s Mexican API business contributed $27.14M in Q3 FY07. At a price of $59M, Dr. Reddy’s gained 18 products (including new steroids) and more importantly got an entry into supplying in-market products to innovators. The rest of the growth in the CPS segment came from an all round increased customer base and product portfolio.

Finally, Dr. Reddy’s emerging business of critical care and biotechnology saw a 20% rise to achieve $4.62M in revenues.

A Pipeline Aided by Partnerships

Besides key acquisitions, Dr. Reddy’s also has a strong set of collaborations related to various candidates in its pipeline, such as potential treatments for diabetes, cancer, heart problems, and chronic obstructive pulmonary disease. “We are also pleased with the company’s efforts to cut down costs by entering into strategic alliances for the development of its pipeline candidates,” notes Napodano. “The collaborations for funding the development of several pipeline candidates including balaglitazone and for the development and commercialization of ANDAs filed in 2005–06 should help the company cut down costs.”

Dr. Reddy s Laboratories has a co-development and commercialization agreement with Rheoscience related to its type 2 diabetes treatment, balaglitazone. The candidate will enter Phase III trials in early 2007, making it the most advanced new chemical entity in the Indian pharma space, according to the company.

Rheoscience is funding all costs associated with the Phase III trials, with a maximum of $3M coming from Dr. Reddy’s. The company will pay Rheoscience a predetermined milestone upon FDA approval. Rheoscience will retain marketing rights in EU and China, and Dr. Reddy’s in the U.S. and rest of the world.

For its lead anticancer compound, Dr. Reddy’s inked a co-development deal with ClinTec. Phase I trials in India have been completed. The company is also working with the University of Auckland in New Zealand to develop on a combination pill of existing drugs to prevent heart problems. It will spend $5.2M to combine aspirin, a drug to lower cholesterol and two blood pressure drugs. Dr. Reddy’s is also partnering with Argenta Discovery for the development and commercialization of a novel approach to the treatment of chronic obstructive pulmonary disease. The firms will identify candidates from a certain class of Dr. Reddy’s compounds.

While Dr. Reddy’s is a strong player in the off-patent generic market and is also growing it’s own pipeline, the series of litigations it faces against big pharmaceutical companies in the U.S. and Europe cannot be ignored. For now, the company enjoys a share price of almost $17. “We upgraded the stock to a Buy in early August 2005,” says Napodano. “Since then, the price has almost doubled.”

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