Reddy to Rock’n’Roll

01/04/2011 4:12 pm EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Shares of the Indian generic drug maker are poised to pop in line with the company’s growing sales, writes Paul Goodwin in the Cabot China and Emerging Markets Report.

Indian pharmaceuticals maker Dr. Reddy’s Laboratories (NYSE: RDY) still gets 69% of revenues from the sale of generic drugs. But the company is also a contract manufacturer of active pharmaceutical ingredients, finished dosing forms and biotechnology products for other pharmaceutical concerns. And a program of original research into potential treatments for cancer, diabetes, cardiovascular disease, inflammation and bacterial infection has produced a strong pipeline of drugs in clinical trials.

Dr. Reddy’s has over 40 families of products in distribution in the US, and 69 Abbreviated New Drug Applications (ANDAs, which are requests for approval of generic drugs) in submission to the US Food and Drug Administration. Of these applications, 32 are “Paragraph 4” filings (claims that products do not infringe on patents or that the patents are not enforceable) and 19 are “first-time filings.” Outside India, the company also has strong generic drug market positions in Russia, the UK and Germany.

While Dr. Reddy’s gets only 2% of revenue from sales of its own proprietary products, the company has used both internal resources and outside acquisitions to increase its original research capability, as well as its generic manufacturing capacity. In 2005, the company bought Roche’s custom pharmaceutical services business for $62 million. And in March 2006, the company sealed its acquisition of Betapharm, the fourth-largest generic drug manufacturer in Germany, and with it Betapharm’s portfolio of over 145 products. A partnership with Argenta Discovery is aimed at development and commercialization of a new treatment for chronic obstructive pulmonary disease.

Bottom Line on the Rise
The earnings line for Dr. Reddy’s Labs has been improving rapidly, with an estimate-beating 41% jump in third-quarter earnings reported on Oct. 23. This quarterly report also showed an 8% gain in revenues and a 15.3% after-tax profit margin that was the highest in years. Estimates for the full fiscal 2011, which ends in March, are for $1.44 per share, up 251% from the prior year.

The long-term chart for RDY shows a stock that spent all of 2006 and 2007 and part of 2008 trading sideways in a tight range in the teens, which is appropriate for a steady-state company. But after the big correction in 2008, the stock blasted off from its low of 7 and hasn’t made a major correction since. The move that began with the stock blasting off from its double bottom at 28 in August pushed RDY to 40 before a little weakness showed up. We think you can buy right here. [Shares traded near $37.30 Tuesday—Editor.]

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