Dr. Reddy's: Pirate to Profits

07/30/2015 9:16 am EST

Focus: STOCKS

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Our latest recommendation has a solid Indian business; it is a generic drug manufacturer that has been growing earnings steadily for six years, explains Paul Goodwin, editor of Cabot China & Emerging Markets Report.

Dr. Reddy’s Laboratories (RDY), founded by Dr. Anji Reddy, began as what can be considered a pharmaceutical pirate.

Dr. Anji Reddy used his PhD in chemical engineering to reverse engineer Western drugs and figure out the manufacturing process.

However, the world changed for Dr. Reddy’s Labs in 2005 when the Indian government officially agreed to recognize and enforce international drug patents.

The company’s move to comply with international laws kicked Dr. Reddy’s Labs onto a development track that has been paying huge dividends ever since.

The company is still a major manufacturer of generic drugs, with more than 200 generics marketed in over 20 countries.

These products bring high-quality, regulatory compliant medicines to millions who might not otherwise be able to afford them.

But the company is now also a fully-integrated global pharmaceutical company that manufactures active ingredients, does contract research for other drug makers, and researches and markets its own original drugs.

Dr. Reddy’s just grossed $1 billion in sales in the US market for the first time, thanks to its fiscal 2015 launch of 12 drugs here.

Its fiscal Q4 and 2015 earnings report on May 12 featured steady, unspectacular growth, with revenue up 10% for the year and earnings up by a penny.

Earnings forecasts for fiscal 2016 (ending next March) are for 14% growth, accelerating to 28% in 2017 as the company’s global business ramps up.

Technically, RDY has been in a long-term uptrend since the middle of 2012. A double bottom correction in May and June set up the stock’s surge to new-high territory.

RDY is a solid business with excellent growth prospects and a small (1/2% annual) dividend. It’s not likely to go on a rampage, but neither is it going to fall on its nose. We recommend buying RDY here.

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