Dr. Reddy needs time for generic sales to replace Sputnik’s revenue (NYSE:RDY)

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Summary of investments

Dr. Reddy’s Laboratories (NYSE: RDY) saw strong revenue growth in 2021 driven by sales of its Sputnik COVID vaccine offering. Over a million doses have been administered in India. Now after the cancellations too like a drop in demand for vaccine internationally, RDY needs to refocus on new generics to keep pace with revenue targets. Shareholders should be excited but also wary about the success of these new generic launches and acquisitions.

Recent Company Financial News

RDY’s involvement in the Sputnik COVID-19 vaccine in 2021 boosted the EPS, but now RDY is trying to replace that revenue this year with its other product segments. Recent earnings show a mixed supply. Gross profit margins reached 59% in the last quarter, compared to 53% last year. Sales in the company’s key North American market increased 48% in the last quarter. A 12% growth in consolidated net income was recorded in Q2 2022 compared to 2021, and revenues increased by 9%.

Moving down, their Global Generics business recorded +18% revenue. On the other hand, Pharmaceutical Services and Active Ingredients sales fell by 23% and ‘Other’ sales fell by 63%. In the Global Generics segment, North America recorded revenue growth of 48%. The emerging markets division was down 6% from last year. Pre-tax profit also rose 27% in the second quarter compared to a year ago.

Long-term share price performance

Based on 5-year stock performance, RDY has generated a year-to-date gain of 55.27%. Comparing this performance to the S&P500, it did only marginally better than the S&P500, which only generated a year-to-date gain of 50.39%.

Moving averages RDY, 50 vs 200

Moving averages RDY, 50 vs 200 (Yahoo finance)

RDY stock price fell below MA50 on June 26, 2021 and has remained below since. However, it is looking to cross the MA50 line if the price is still on the upside. Historically, when the price breaks below the MA200 line, there is a strong rebound shortly. When the share price first fell below MA200 in February 2022, there was still a rebound, although not at 2020 levels. This was partly due to headwinds negative macroeconomics, recession fears, rising interest rates and supply chain disruption. Currently, the stock price is approaching the MA200 line and if there is a retracement, it could be an opportunity to start a position once it drops below the MA200 line.

Currently, RDY is trading at a forward P/E of 20+, which is slightly above the healthcare sector’s average forward PE of 15.1. However, this is justified because the company has paid a constant dividend with a payout ratio of at least 15%. The company has also been steadily increasing its EPS and even with the recent lackluster outlook for 2021 and 2022, its EPS and revenue have not missed out on normal estimates. Hence, this would warrant a higher forward P/E ratio relative to the healthcare industry average.

Financial overviews

EBITDA and profit margin increased compared to 2018, while gross margin remained at about the same level over the past 5 years. This is a mixed sign as it shows management’s resilience and ability to keep costs down given the current supply chain and headwinds of inflation that most businesses are facing, but also possible headwinds and a reliance on new products replacing old ones. Asset productivity has increased over the past 5 years, showing that management is effectively using its assets to generate a return. The current ratio has increased, showing that there is enough cash on the balance sheet for management to pay off all of its current liabilities if it chooses to do so. The interest coverage ratio has also increased, which means that management has reduced its debt leverage.

RDY Financials

RDY Financials (SEC filing)

EPS has increased steadily over the past 5 years, and overall the company has shown some improvement over the past 5 years. Assuming a market risk premium of 5.60%, the equity beta of RDY is 0.22. CAPM = 4.01% + (5.60% x 0.22) = 5.24%. Based on their annual report, interest expense is $644 million and total borrowing is $21,711 million. The cost of debt is 2.97% and the equity financing ratio (E/V) is 0.75. The debt funding ratio (D/V) was 0.25.

RDY income statement, consolidated

RDY income statement, consolidated (SEC filing)

The dividend payout ratio has been 15% to 25%, which is the average dividend payout ratio over the past 5 years. Although it never bottomed out at 15%, the outlook for the current macro economy is questionable and it would be more prudent to forecast a lower worst-case dividend payout rate.

RDY’s cash position for 2022 was $0.61 billion.

Overview of short-term earnings and prices

RDY continues to make inroads into the generics market through acquisitions, licensing agreements and new product launches. More recently, RDY’s early generic releases of time-release antihistamines as well as sorafenib for the treatment of kidney and liver cancers have shown that RDY is moving towards a broad range of generics. It has also accelerated its pace of acquisitions and licensing, with Biorphen and related low blood pressure drugs as well as white label Lumify for the treatment of eye redness. The unloading of its non-generic portfolio continues, with I/ONTAK/e7777 coming to mind, an oncology drug focused on CTCL and potentially PTCL which was a reformulation of a previously approved drug.

The extended-release antihistamines Fexofenadine HCI and Pseuudoephedrine HCI are a generic replacement drug for Allegra-D 24hr, which had retail sales in the United States of approximately $45 million as of May 2022. Sorafenib tablets are a generic substitute for Nexavar, which had sales of over $750 million. in 2020. Cysteine ​​hydrochloride injections are generics for Biorphen and Rezipres injections, with a total addressable market of $174 million in 2022. Brimonidine Tartrate Ophthalmic Solution, a generic intended replacement for Lumify OTC eye drops, has a total addressable market of $130 million in 2022. I /ONTAK/e7777 represents a total of over $100 million in one-time payments once approved, with revenue share thereafter of an immediately addressable market of +/ – $330 million.

In total, with several acquisitions and bringing new generic drugs online, RDY hopes to capture some of the $634 million in addressable markets as well as some of the approximately $800 million in ongoing sales from current sales of brand name drugs from the above generic launches. These are the largest product launches not hampered by lawsuits or FDA approval delays, and whose sales are expected to help drive sales across all segments to help fill the gaps Sputnik vaccine. By incorporating relatively conservative estimates of these short-term sales of 10-20% and applying a 10% safety margin, the fair value of RDY would be approximately $49-51 per share, relative to the current price of the share of ~$54. Therefore, RDY appears to be slightly overvalued at the moment. To take full advantage of the revenue from these new generics, RDY needs at least 3-4 quarters to grow. Therefore, a stock price above $54 is justified after sales of these new generics are reflected, assuming that RDY is able to capture 40%+ of its addressable market and sales targets.

Potential external factors and downside risks

Commodity price fluctuation

Raw materials purchased during drug development/manufacturing can fluctuate wildly. The 2022 commodity price cycle has shown huge swings compared to pre-COVID years. With the recent war between Ukraine and Russia and the risks of recession, the prices of materials have increased quite significantly since 2021. This would affect the gross margin and the net result.

Rising interest rates have an impact on the attractiveness of the dividend yield

RDY, like many dividend-paying stocks, will experience negative outflows due to higher interest rates being offered across the world. Although some Fed bank chairs have signaled lower interest rate hikes in 2023, the market consensus is that 5% and above will be the new benchmark for the Fed chair going forward, unless the major inflation indicators do show a downward trend.

Recalls and negative public relations

RDY seems to be more prone to recalls and negative press than its American and European counterparts. Their 2019 and 2020 recalls of ranitidine, nitrofurantoin and aripiprazole products due to contamination and manufacturing issues seem to point to gaps in oversight. While manufacturing issues can be quite common at large pharmaceutical companies, public scrutiny of these recent recalls may impact the adoption of their new generic product launches in the near term in the US and European markets.

Conclusion

Although RDY has shown a strong push towards the commercialization and launch of its generic product lines, it remains to be seen whether they can recoup lost revenue from their Sputnik COVID vaccine offering, and subsequently, the current price of the stock around $54 appears to be in line with expectations. New revenue streams are not seasoned enough to show true revenue potential, so RDY remains a long-term expectation and expectation.

About Joel Simmons

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