Product Delays Dull Dr Reddy’s Despite Upbeat Management
Executive Summary
Dr Reddy’s had a generally positive Q4 but a slow ramp in some products in the US and potential delays in anticipated launches there are among the challenges that appear to have jaded investor outlook. Management commentary, though, was optimistic, with around 30 launches lined up for the US, a China/India thrust and M&A staying an important cog for growth.
Management reported a “much more stable” pricing environment in the US compared with the last few quarters and increased launch momentum since January 2019, including for limited competition products like propofol injection, daptomycin and testosterone gel. North America generics revenues for the fourth quarter ended March 2019 stood at INR15bn ($216.2m), up 3% over the same period of the previous year, but just 1% higher over the third quarter.
Dr Reddy’s COO Erez Israeli said that the company was “actively partnering” with customers to ramp up the new launches and realize contribution in the quarters to come.
“In FY 2020, we expect to launch more than 30 products. We continue to work with the agency [US FDA] to secure the approvals for the scheduled launches including generic NuvaRing (etonogestrel/ethinyl estradiol vaginal ring) and monetize this asset during the course of the year,” Israeli said on the company’s post-results earnings call. (Also see "Record Dr Reddy's US Launches In Q3 Set Tone For Earnings Pick Up?" - Scrip, 4 Feb, 2019.)
Delay In Launch Timelines
But analysts have been closely monitoring the ramp-up of recent launches such as propofol and timelines for key product filings and some weren't too impressed.
Dr Reddy’s sought to allay concerns explaining that propofol is a “very interesting product,” with only Fresenius SE & Co. KGaA controlling most of the market share in the US.
“As of now the contribution is very low, but this is going to increase and [in] FY2020, definitely it will be a meaningful product. And it will be a product which will be there for long-term,” the company said.
On generic Suboxone (buprenorphine and naloxone), the company noted that, among other reasons, that the initial “level of conversion” between the innovator and the generics was lower than had been anticipated by customers.
“We do see it changing, and see it picking up. Overall, we believe that Suboxone is a very nice asset for us, even if in the beginning there was some slow uptake because of the level of conversions from the innovator to the generics,” COO Israeli said. In February, the company re-launched its generic Suboxone following a favorable decision of the US Court of Appeals for the Federal Circuit that held that Indivior PLC had not shown that it is likely to succeed on its claim that Dr Reddy’s product infringes its US Patent No. 9,931,305.
On the generic Copaxone (glatiramer acetate injection) filing, Dr Reddy’s said that it had recently received additional queries from the FDA and was in the process of assessing the requirements. Launch timelines for generic Copaxone now appeared pushed to fiscal year 2021 versus prior expectations of around the second half of 2019.
Israeli, however, emphasized that the product continues to remain “an exciting pipeline opportunity for us.”
Jefferies noted that generic NuvaRing and Copaxone launches had been delayed by three and nine months respectively and R&D spends were set to increase in FY20.
“While Dr Reddy’s is working on turnaround, the benefits will take two years-plus and near term, base business remains key,” Jefferies equity analyst Piyush Nahar said in a note dated 19 May.
Dr Reddy’s ended almost 6% lower closing at INR2588.05 on the Bombay Stock Exchange on 20 May, following its results announcement on 17 May.
‘Market Leading Performance In Key Spaces’
But current product related challenges notwithstanding, Dr Reddy’s has been chiseling and calibrating its operations with a focus on profitable growth, cost efficiency and quality. (Also see "Big Cost Cuts At Dr Reddy’s, US Big Ticket Launch Progress Is Key" - Scrip, 27 Jul, 2018.)
In addition to certain key changes in the leadership team, the company has taken steps towards optimizing cost structures and also divested certain non-core assets. In April, Dr Reddy’s struck a deal with Encore Dermatology Inc. for the sale and assignment of US rights of three dermatology brands.
Dr Reddy’s has also identified six key “spaces” that it expects to focus on in the coming years – namely US generics, India, Russia, China and the active pharmaceutical ingredients and global hospital business segment. Management commentary on the emerging opportunities in China remained upbeat – the firm believes that around 70 products from its US portfolio meet China’s new regulatory requirements. An additional plant is also planned in China. (Also see "India Pharma Firms Eye China, Dr Reddy’s Sees ‘Great Opportunity’ There" - Scrip, 29 Oct, 2018.)
Dr Reddy’s s co-chair and CEO GV Prasad said that going forward key priorities include ensuring market leading performance in each of the chosen six spaces, alongside continuing to focus on developing high-impact products from the proprietary products business and also building a healthy pipeline of biosimilar products for the global market.
For the fourth quarter, overall revenues rose 14% to INR40.17bn, while net profits stood at INR4.34bn. The quarterly performance recognizes INR1.80bn as revenue and INR159m representing the profit on sale of intangible assets (after adjusting the associated costs) from the Encore deal.
Inorganic Growth
M&A also stays firmly on the radar with the CEO saying that Dr Reddy's expects to “actively pursue” inorganic opportunities to augment organic growth, ensuring value creation for shareholders.
While specifics on M&A plans are not known India is probably one of the markets where the firm hopes to scale up.
COO Israeli, in response to analyst’s query on the Indian market, noted that it is a market where the company sees itself as one of the leaders and aims to first excel “in what we do - leveraging our brand, and by enhancing the brands that we have and launching new brands.
“And this is a market that we will pursue if, we can, if possible, inorganic moves,” the COO added.
Dr Reddy’s recently acquired 42 approved but non-marketed US ANDAs including over 30 generic injectable products. The acquired products will need to be technology transferred and are expected to be ready for launch within the next one to two years. (Also see "Asia Deal Watch: Shionogi Finds Commercial Partners For Symproic In US, Europe" - Scrip, 23 Apr, 2019.)