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“From the point of view of a pharmaceutical company, modern drugs are expensive to develop. From time- and labor-intensive development through expensive clinical trials and on to the dicey business of promoting and marketing a new drug, costs can be overwhelming. And the worst thing is that a company gets to enjoy only 20 years of patent protection for a new drug (although there are lots of tricks to stay ahead of the race in holding onto important drugs). But from the point of view of the consumer, modern drugs are just expensive, period. And the best thing is that after just 20 years (see note below), a drug can be duplicated by generic drug manufacturers and sold to those who need it for far less money.
“That’s where Dr. Reddy’s Laboratories, Ltd. (RDY 31.08 NYSE) comes in. Dr. Reddy’s is a growing global power in the pharmaceutical business, with a lineup of more than 50 products offered in the U.S., more than 160 products marketed in Europe, and more than 200 branded formulations available in India, Russia and other emerging markets. Founded in 1984 by Dr. Anji Reddy (his Ph.D. is in Chemical Engineering), Dr. Reddy’s Labs is the main reason India has gone from a net drug importer to a net drug exporter. And as the company grows—both via its aggressive program of acquisition and by organic growth—it is ramping up its original pharmacological research in pursuit of original drugs.
“Dr. Reddy’s Labs is a global concern, with just 17% of revenue coming from India. North America contributes 35%, Western Europe 26% and Russia/ Eastern Europe 11%. In terms of product mix, revenues are heavily weighted toward generic drugs (72% of 2009 revenues), with pharmaceutical services and active pharmaceutical ingredients (27%) and proprietary products (1%) making up the rest. The company launched more than 90 new generic products worldwide in the nine months ending March 31, and has 62 ANDAs (abbreviated new drug applications) in its generic pipeline.
“Note: Drug patents in the U.S. provide for 20 years of patent protection, but that period is measured from the date of the original application. Given the number of years needed to successfully complete clinical trials and receive FDA approval for distribution, the effective period of protection is usually between seven and 12 years. Since India agreed in 2005 to recognize international drug patents, there will be some lag in Dr. Reddy’s access to drugs patented after 2005, but that’s one reason the company is aggressively pursuing other business lines.
“Dr. Reddy’s bought a custom pharmaceuticals services business from Roche in 2005 and took over Germany’s Betapharm in 2006. Transfer of Betapharm’s manufacturing division from Germany to India is expected to yield significant cost savings. Dr. Reddy’s original drug research centers on metabolic disorders, cardiovascular diseases and bacterial infection.
“The company’s earnings line is a little rocky, with Q1 2009 showing a large per-share loss due to an impairment charge following decreases in German pharmaceutical prices. But recent quarters have been terrific, and the future looks even brighter, with estimates of fiscal 2011 earnings up 219%.
“The chart for RDY is very strong, soaring from a March 2009 low of 7 to over 31 in recent trading. The stock’s 2010 history features a great run from a low of 23 following the January correction to 29 in early April. Then comes two months of total junk—high volatility and big swings that dropped the stock to an intraday low of 24 during the flash crash. In general though, the stock found support at 26 through April and May, which set the stage for a breakout run in late May and early June on slightly elevated volume. Clearly, there’s an institutional move in RDY’s direction going on, as institutional sponsorship is up from just 5 two quarters ago to 12 now.
“With the Cabot China-Timer still negative, it’s just not prudent to be doing much buying, if any at all. But if you have a large amount of cash and have purged your portfolio of losers, we think you can buy a small amount of RDY. This dividend-paying stock has a lot going for it, including the power to make progress while most of the rest of the China and emerging markets universe is stuck in the mud. BUY A LITTLE.”
Paul Goodwin, Cabot China & Emerging Markets Report
