Saturday, August 19, 2006

Dr. Reddy's Laboratories Limited Analysis

RDY or Dr. Reddy's Laboratories is an Indian company that is a generic drug and API (active pharmaceutical ingredient )manufacturer. In 2005 and 2006, a lot of the patents owned by large US pharmaceuticals have come off the patent protection. This opens the doors for generic drug manufacturers to produce similar drugs at much lower prices. This is an emerging market company that is listed in NYSE - as part of our continuing analyis of emerging market segment, we will look at this company in more detail.

Interestingly enough, the foreign ownership of the company is at 50.82% - through foreign institutional investors, non resident indians and american depository receipts. The ADRs account for ~20% of the company. The insider holding is only about 2%. The large foreign holding may be justified as the company earns more than 70% of its revenues through international markets. In 2005-2006, the company's revenues increased by 28% and the company swung to a profit from a loss in the prior year.

The company's growth in each of the business segments in 2006 was as follows. API segment saw a growth of +25%, the formulation sector saw a growth of +30%, generics were constant at 0% growth, critical care and biotechnology was up 32% and custom pharmaceutical services was up 721%. The net income was 6.7% of revenue.

In 2007 Q1 report, the company did significantly better. In addition to the growth in the API and branded formulations segment, the company also saw significant growth in the generics market in the European and the North American market. The company has exclusive contracts with Merck to market the generic version of its block buster drugs that are coming off of patent.
In Q1 2007, the company's revenues increased by 251% compared to the same quarter in the previous year. The profit margins have also increased to 10% of revenue in Q1 2007.

Does this mean the company is on a roll? The exclusive agreement with Merck should help the company extend its profit margins for some more time in the generics business. The growth in its core business is continuing to grow. The company is currently selling at a P/E of around 40 - the prospects for the company look good and should be part of the portfolio of Indian stocks. The list of Indian companies available as ADRs is noted in an earlier article in this blog.

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