Dr. Reddy's: Emerging generic gains

by Benjamin Shepherd, editor Global Investment Strategist

In emerging countries, as incomes have grown and standards of living improve, demand for health care has skyrocketed. Drug sales in emerging market could reach $550 billion annually by 2020.

And because health insurance is still in its infancy in most of the emerging world, generic drugs will dominate the space. Dr. Reddy’s Laboratories (RDY) is one of the best-positioned players in the emerging market generics business.

The second-largest pharmaceutical company in India, Dr. Reddy’s is one of the fastest growing, with revenue achieving an average compound annual growth rate of about 15 percent.

Despite strong competition, the company ranks at or near the top of market share with its target products in emerging market countries.

Meanwhile, the company is making strong inroads into the generics market in North America, where its generic versions of drugs such as Plavix and Lipitor are defying price pressure and attracting more customers.

For its first quarter of fiscal 2013 ending in June 2012, Dr. Reddy’s reported total revenue growth of 28 percent.

A major driver of the company’s stellar sales growth has been the bargain retail price of Dr. Reddy’s products, thanks to the company’s low-cost operations and efficient use of capital.

Over the past five years, the company’s gross margin has run in excess of 50 percent, with net margin in the mid-teens over the past two years. Return on assets and equity are running at 13.3 percent and 27.6 percent respectively, among the best in the pharmaceutical business.

Dr. Reddy’s is also a major presence in the active pharma ingredients (API) market; many smaller drug companies simply don’t have the expertise or capacity to manufacture those active ingredients on a commercial scale, forcing them to rely on companies such as Dr. Reddy’s to handle that process for them.

To produce active ingredients, a pharmaceutical company must have a drug master file (DMF) on record with regulators in the market where the product is to be sold.

Dr. Reddy’s has a global cumulative total to 550 DMFs with 188 in the US. That’s the broadest portfolio of DMFs of any generic manufacturer, giving Dr. Reddy’s a clear competitive advantage in the space.

Dr. Reddy’s will also benefit from a growing portfolio of strategic partnerships to manufacturer and market drugs worldwide.

The company recently inked a deal with Merck for the two companies to cooperate in developing and manufacturing a variety of new and existing drugs. It has also sealed a deal with GlaxoSmithKline that allows it to market a variety of products in the emerging world.

Both deals are clear recognition of Dr. Reddy’s ability to operate in less-developed regions. Continue buying Dr. Reddy’s up to $37.

Learn more about this financial newsletter at Benjamin Shepherd's Global Investment Strategist.

Related articles:

• AstraZeneca: Value in pharma
• Express Scripts: A value play
• Fresenius: Dollars in dialysis
• 5 favorites for foreign exposure