Monday, November 9, 2009

Dr. Reddy's Laboratories (RDY) Impressive on Both Fundamental and Technical Basis

While I've traded Dr. Reddy's Laboratories (RDY) in the past, I have not touched it in the past few years; however as we await for the new Market Vectors Indian Small Cap fund to launch I was poking my nose around Indian stocks this weekend since the Indian market has corrected quite a bit (and rebounded from oversold levels last week).  So this name came back onto my radar in the limited universe of Indian ADRs.  (full list of Indian stocks available at TickerSpy)

Other than Bucyrus (BUCY) I cannot find a better chart, and right now it's all about charts, momentum, and liquidity so let's start there.  Not much you can argue with here; you can see as Sensex took a big hit (large caps were hit hard in India) Dr. Reddy's downdraft was relatively limited.  Further, with today's move the stock has broken out to yet another new high which technicians love to see (and chase into).

As for fundamentals, Dr. Reddy's is a pharmaceutical company with a large emphasis on generic drugs; you might be familiar with Teva Pharmaceuticals (TEVA) which would be a larger fish in a similar pond.  If you pull up a 10 year chart on TEVA you essentially have 10 bagger; the stock has moved from $5 to $50 so you can see that while not a sexy space, it can be very profitable if you are a dominant franchise.  For Dr. Reddy's, in the last quarter generics were $264 of the $382M in revenue, or 69%.

Established in 1984, Dr. Reddy's Laboratories (NYSE:RDY - News) is an emerging global pharmaceutical company with proven research capabilities. The Company is vertically integrated with a presence across the pharmaceutical value chain. It produces finished dosage forms, active pharmaceutical ingredients and biotechnology products and markets them globally, with focus on India, US, Europe and Russia. The Company conducts research in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infection.

RDY is a $4 B market cap company, which trades about 300K shares a day so it fits in our wheelhouse nicely - we'd prefer a bit more volume each day however.  While Indian based, this is a global company with 1/3rd of business in the US and 1/4th in Europe; India is under 20%.  Let's take a quick look at their last earnings report to show some of the positive growth metrics.
  • Indian drug maker Dr Reddy's Laboratories Ltd (RDY) said on Friday quarterly profits doubled from a year ago helped by the launch of new generics abroad, beating forecast and sending its shares higher.  Global demand for generic drugs from companies such as Dr Reddy's and domestic rivals Ranbaxy Laboratories and Cipla Ltd is booming as nations around the world battle rising healthcare costs.
  • Consolidated revenues at Rs. 18.4 billion ($382 million) in Q2 FY10 as against Rs. 16.2 billion ($336 million) in Q2 FY09, representing a growth of 14%. The growth is largely driven by Global Generics
  • Operating income at Rs. 2.6 billion ($53 million) in Q2 FY10 as against Rs. 1.8 billion ($37 million) in Q2 FY09. 
  • During the quarter, the company launched 39 new generic products, filed 24 new product registrations and filed 5 DMFs globally. 
  • Gross profit at Rs. 8.7 billion ($181 million) in Q2 FY10 represents a margin of 47% to revenues as against 49% in Q2 FY09. The current quarter margins have been impacted by one-time inventory provisions of €6 million in betapharm on account of non-moving stocks and $4 million in the US for inventory valuation adjustments of sumatriptan stocks lying with the company. Excluding these non-recurring items, the adjusted margins are at 51%.  (have to love a 50%+ gross margin)
  • R&D expenses at Rs. 963 million in Q2 FY10 represent 5% of revenues. 
  • Dr Reddy's said its U.S. revenues grew 39 percent in the quarter ended September to 4.3 billion rupees, while European sales dropped 15 percent to 2.8 billion rupees weighed down by its German subsidiary. The company's wholly-owned German unit Betapharm, which Dr Reddy's bought in 2006 for $572 million, has been a drag on its earnings due to supply constraints and falling prices.

More details on the generic business:
  • Dr Reddy's plans to launch six to seven new generics in the U.S. in fiscal 2009/10 including blockbuster omeprazole, a generic version of AstraZeneca's Prilosec for treating stomach ulcers and acid reflux. [ID:nBOM539118]   Last year, the New York-listed company  launched acute migraine drug sumatriptan, a generic of GlaxoSmithKline's Imitrex, in the U.S. market.
Full report here

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