Dr Reddy’s Labs
BSE SENSEX
31,892
S&P CNX
9,974
1 September 2017
Update | Sector: Healthcare
CMP: INR2,217
TP: INR2,500 (+13%)
Neutral
Suboxone litigation in favor of DRRD; US FDA approval key
The District Court of Delaware (US) has ruled in favor of Dr. Reddy’s (DRRD) in the
Suboxone litigation. The court found the patents ‘150, ‘514, ‘497 valid and non-infringing.
According to IMS, secondary sales for Suboxone films stood at USD1.7b (primary:
USD850m) in CY16. In August 2016, DRRD had acquired eight ANDAs, including
gSuboxone, from Teva Pharmaceutical. Suboxone Film is indicated for the treatment of
opioid dependence.
Bloomberg
Equity Shares (m)
M.Cap.(INR b)/(USD b)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
Avg Val, (INR m)
Free float (%)
DRRD IN
170.5
526.3 / 7.8
3395 / 1902
-7/-33/-41
1145
73.2
Financials & Valuations (INR b)
Y/E Mar
2017 2018E
Net Sales
140.8 154.4
EBITDA
24.2
28.9
PAT
12.0
14.5
EPS (INR)
72.6
85.1
Gr. (%)
-45.1
17.3
BV/Sh (INR)
740
792
RoE (%)
9.7
11.3
RoCE (%)
6.4
8.0
P/E (x)
30.5
26.0
P/BV (x)
3.0
2.8
2019E
177.4
38.7
21.4
125.2
47.0
902
14.8
11.1
17.7
2.5
Shareholding pattern (%)
As On
Jun-17 Mar-17 Jun-16
Promoter
26.8
26.8
26.4
DII
11.7
10.6
5.8
FII
31.6
32.4
52.3
Others
29.8
30.3
15.6
FII Includes depository receipts
Stock Performance (1-year)
Dr Reddy's Labs
Sensex - Rebased
3,900
3,400
2,900
2,400
1,900
Could be limited competition product in medium term:
As of now, there only
five generic players with whom patent litigation is ongoing (DRRD, Actavis, Par
Pharmaceuticals, Mylan and Alvogen). According to the June 2016 ruling, Par
and Actavis are infringing patent ‘514 (valid until 2024) – both players will
approach the US Court of Appeals for the Federal Circuit. Hearing on litigation
against Alvogen and Mylan will start from 25-Sep 2017. Indivior expects the
ruling in this case to come by 1QCY18 (by this time, the 30-month stay on
Alvogen/Mylan’s products will also be over). Given that the patent is still valid,
any new player will have to go through a 30-month stay for FDA approval.
Key to watch how sales shifts to buprenorphine monthly depot:
On 31 July
2017, the USFDA accepted Indivior’s new drug application (NDA) for
buprenorphine monthly depot (RBP-6000). The FDA has set a PDUFA target
action date of 30 November 2017, and Indivior expects launch of RBP-6000 by
1QCY18 (expected top-line of USD1b). It would be key to watch that how much
sales shift happens from Suboxone films to RBP-6000. Notably, even though
Suboxone tablets became generic (in 2013), Suboxone films continued to
maintain ~60-61% market share in buprenorphine treatment for opioid
dependence in the US. Given that RBP-6000 depot will have monthly dosage
v/s daily for films, Indivior expects this to be a superior product.
Do not expect launch in next 12 months:
There was a pending Complete
Response Letter (CRL) on DRRD’s gSuboxone, to which the company has already
responded in June-17. It is critical that DRRD resolves issues highlighted by the
USFDA. DRRD has a target action date (TAD) of 4QFY18 for gSuboxone. Indivior
will appeal against the district court judgment in the higher court. Indivior
expects the legal battle to continue for another 12-18 months. DRRD has already
indicated in its 1QFY18 earnings call that it will wait for the outcome of the legal
hearing (will not go for at-risk launch even if the USFDA approves the product).
May not contribute much if all players come to market:
If all the five generic
players come to market and 30-50% market shifts to RBP-600, then annualized
EPS contribution will not be >INR8-10 in the medium term. However, if only 2-3
generic players are able to come to the market and there is minimal impact of
RBP-6000 launch on films, then EPS contribution could be INR25-30.
USFDA remediation key; maintain Neutral:
We believe the stock will remain
range bound until there is more visibility on key launches in the US (incl. Aloxi,
Nuvaring, Suboxone, Copaxone 20 & 40mg). We maintain
Neutral
with a target
price of INR2,500 @ 20x FY19E PER.
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
Kumar Saurabh-Research analyst
(Kumar.Saurabh@MotilalOswal.com); +91 22 6129 1519
Ankeet Pandya-Research analyst
(Ankeet.Pandya@MotilalOswal.com)

Dr Reddy’s Labs
Key takeaways from concall of Indivior on DRRD’s Suboxone litigation
Indivior does not expect DRRD’s product to come in the market in 2017, as the
latter has received CRL, to which it responded in June-17.
Expected launch of RBP-6000 is in 1QFY18.
Given that RBP-6000 will have a monthly dose (and not daily dosage like in case
of Suboxone films), it will be a superior product.
Indivior will challenge the ruling in the higher court.
Indivior expects a legal battle of another 12-18 months.
Indivior will be open to legal battle and settlement with a generic player.
Why DRRD product was not infringing ‘514 patent v/s Watson and Par product:
Manufacturing process for DRRD was different from Par and Watson.
Indivior expects ruling on case with Mylan and Alvogen to come by 1QCY18.
Any new generic player (apart from existing 5 players) will have to go through
30-month stay under the Hatch-Waxman Act.
Exhibit 1: Current status of litigation on Suboxone
Company
Actavis
Par Pharmaceuticals
Dr. Reddy's
Alvogen
Mylan
Sandoz
Comments
rd
Following the ruling on 3 June 2016, both Actavis and Par Pharma are prohibited from launching the generic
version of Suboxone. The court, in its decision, ruled that two of the three patents were found to be valid and one
st
was deemed to be infringed. On 1 Sept, the Court issued a ruling denying Actavis and Par's appeal to reopen the
2016 decision, as it infringes patent’514; has been denied sale of the generic product until expiration in 2024.
However, both the companies can appeal at the US court of Appeals for the Federal Circuit.
st
On 31 August, the court ruled the decision in favor of Dr. Reddy's, stating that there has been no infringement, and
the company uses different process to make its film. Indivior can appeal against the ruling in the higher court within
two weeks
th
Trial against Alvogen and Mylan is scheduled for 25-27 September 2017. Alvogen's ANDA application for Suboxone
th
th
expires on 29 October 2017 and Mylan's application expires on 24 March 2018. Indivior expects outcome of the
trial by 1QCY18.
Suboxone patent litigation against Sandoz has been dismissed as the company is no longer pursuing Para IV
certification.
Source: Company, MOSL
Exhibit 2: Suboxone market share
Source: INDIVIOR Annual report
1 September 2017
2

Dr Reddy’s Labs
Story in charts
Exhibit 3: Ramp-up of key launches to boost US sales
77
32
Core US sales (INR b)
56
18
17
-16
27
FY12
35
FY13
55
FY14
65
FY15
75
FY16
64
FY17
68
78
FY12
FY13
FY14
FY15
FY16
FY17
FY18E FY19E
15
YoY Growth (%)
Exhibit 4: Revenues to grow at 12% CAGR over FY17-19E
29.5
20.2
Total sales (INR m)
YoY growth (%)
13.7
12.1
4.4
-9.0
9.7
14.9
7
FY18E FY19E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 5: Domestic Biz expected to pick up from 2HFY18
DF Revenue (INR b)
19.2
12.6
7.9
13.7
8.6
12.0
YoY Growth (%)
18.0
Exhibit 6: EBITDA margin to gradually pick up
EBITDA (INR M)
24.5
21.3
24.0
22.6
EBITDA Margin (%)
25.3
17.2
18.7
21.8
10.6
13
FY12
15
FY13
16
FY14
18
FY15
21
FY16
23
26
31
23,742 24,763 31,699 33,472 39,088 24,155 28,881 38,669
FY12
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY17E FY18E FY19E
Source: Company, MOSL
Source: Company, MOSL
Exhibit 7: R&D expense as % of sales
R&D (INR m)
11.8
9.4
6.1
6.7
11.5
As a % of sales
13.9
13.0
12.0
Exhibit 8: EPS to grow at 31% CAGR from FY17-19E
Core EPS (INR/ share)
5,911
FY12
7,781 12,403 17,449 17,834 19,551 20,078 21,286
FY13
FY14
FY15
FY16
FY17
FY18E FY19E
66
73
81
125
130
132
73
85
125
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E
Source: Company, MOSL
Source: Company, MOSL
1 September 2017
3

Dr Reddy’s Labs
Financials and valuations
Income Statement
Y/E March
Net Sales
Change (%)
Other Income
EBITDA
Change (%)
Margin (%)
Depreciation & Amort.
EBIT
Int. and Finance Charges
Net Interest Exp
Forex (Gains)/Losses
PBT & EO Expense
Change (%)
PBT after EO Expense
Tax
Tax Rate (%)
Reported PAT
Adjusted Net Profit
Change (%)
Margin (%)
2014
132,171
13.7
1,753
31,699
28.0
24.0
7,085
24,614
0
79
-329
26,616
22.8
26,616
5,093
19.1
21,524
21,188
54.9
16.0
2015
148,189
12.1
2,871
33,472
5.6
22.6
8,103
25,369
0
77
0
28,163
5.8
28,163
5,984
21.2
22,179
22,179
4.7
15.0
2016
154,708
4.4
1,103
39,088
16.8
25.3
10,343
28,745
0
334
2,374
27,140
-3.6
27,140
7,127
26.3
20,013
22,577
1.8
14.6
2017
140,809
-9.0
2,220
24,155
-38.2
17.2
11,722
12,433
0
0
0
14,653
-46.0
14,653
2,614
17.8
12,039
12,039
-46.7
8.5
2018E
154,443
9.7
1,900
28,881
19.6
18.7
11,274
17,607
0
518
0
18,988
29.6
18,988
4,462
23.5
14,526
14,526
20.7
9.4
(INR Million)
2019E
177,381
14.9
1,950
38,669
33.9
21.8
12,417
26,252
0
468
0
27,734
46.1
27,734
6,379
23.0
21,355
21,355
47.0
12.0
Balance Sheet
Y/E March
Equity Share Capital
Reserves
Net Worth
Loans
Deferred Liabilities/Tax
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Investments
Goodwill/Intangibles
Curr. Assets
Inventory
Account Receivables
Cash and Bank Balance
Others
Curr. Liability & Prov.
Account Payables
Other Current Liabilities
Net Current Assets
Appl. of Funds
2014
851
89,950
90,801
44,742
-3,310
132,233
52,958
21,213
37,814
26,384
14,697
78,664
23,992
33,037
8,451
13,184
31,936
10,503
21,433
46,728
125,623
2015
852
110,450
111,302
43,126
-4,013
150,414
72,011
30,040
48,090
38,871
16,430
85,580
25,529
40,755
5,394
13,901
38,556
10,660
27,896
47,024
150,415
2016
853
124,845
125,698
33,403
-5,368
153,733
81,635
35,505
52,756
41,854
20,596
82,730
25,579
41,250
4,921
10,980
44,203
9,068
35,135
38,527
153,733
2017
829
121,792
122,621
49,075
-5,164
166,532
92,605
42,324
56,376
26,317
46,176
82,512
28,528
38,196
3,865
11,923
44,849
10,569
34,280
37,663
166,532
2018E
853
134,205
135,058
49,311
-5,164
179,205
103,653
53,598
56,149
26,317
46,176
89,232
31,815
38,036
2,393
16,989
38,669
13,073
25,596
50,563
179,205
(INR Million)
2019E
853
153,011
153,864
44,311
-5,164
193,011
114,700
66,015
54,780
26,317
46,176
108,396
35,467
43,685
9,732
19,512
42,657
14,574
28,084
65,738
193,011
1 September 2017
4

Dr Reddy’s Labs
Financials and valuations
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
PEG (x)
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
ROIC
RoE
RoCE
Working Capital Ratios
Fixed Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Leverage Ratio
Debt/Equity (x)
0.5
0.4
0.3
0.4
0.4
0.3
2.7
91
66
2.4
100
63
2.0
97
60
1.6
99
74
1.6
90
75
1.6
90
73
2014
124.6
166.2
533.8
18.0
16.6
17.8
0.3
4.2
2.9
12.2
0.8
23.6
25.9
16.6
2015
130.2
177.7
653.2
20.0
17.9
17.0
3.6
3.4
2.5
11.3
0.9
20.9
21.9
14.2
2016
132.3
193.0
736.8
17.6
17.6
16.8
9
3.0
2.4
9.3
0.8
21.2
19.1
14.1
2017
72.6
143.3
739.6
10.9
17.6
30.5
NA
3.0
2.8
16.4
0.5
8.9
9.7
6.4
2018E
85.1
151.2
791.7
12.8
17.6
26.0
1.3
2.8
2.6
13.8
0.6
9.8
11.3
8.0
2019E
125.2
198.0
901.9
18.8
17.6
17.7
0.4
2.5
2.2
10.0
0.8
13.7
14.8
11.1
Cash Flow Statement
Y/E March
Op. Profit/(Loss) before Tax
Interest/Dividends Recd.
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
(inc)/dec in FA
Free Cash Flow
(Pur)/Sale of Investments
CF from Investments
Change in net worth
(Inc)/Dec in Debt
Other Items
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
2014
31,699
2,003
-5,093
-5,265
23,344
-12,329
11,015
-8,253
-20,582
-247
8,064
-1,640
-3,581
2,596
5,357
5,136
10,493
2015
33,472
2,793
-5,984
-3,353
26,929
-20,112
6,817
-12,487
-32,599
2,302
-1,617
-704
-3,979
-3,998
-9,668
8,451
-1,217
2016
39,088
-1,605
-7,127
8,024
38,380
-19,175
19,205
-2,983
-22,158
-2,104
-9,723
-219
-3,512
-15,558
664
5,394
6,058
2017
24,155
2,220
-2,614
-192
23,569
-40,922
-17,353
15,537
-25,385
-13,003
15,672
0
-2,113
556
-1,260
4,921
3,661
2018E
28,881
1,382
-4,462
-14,372
11,428
-11,048
381
0
-11,048
460
236
0
-2,549
-1,853
-1,472
3,865
2,393
(INR Million)
2019E
38,669
1,482
-6,379
-7,836
25,936
-11,048
14,888
0
-11,048
1,199
-5,000
0
-3,748
-7,549
7,339
2,393
9,732
1 September 2017
5

Disclosures:
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Dr Reddy’s Labs
NOTES
Disclosure of Interest Statement
Analyst ownership of the stock
Dr Reddy’s Labs
No
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investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and
interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S.
registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and
therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in
the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following
representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Disclaimer:
The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person
or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of
offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or
appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this document should make such investigations
as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to
determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative
products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of
the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the
views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time
without any prior approval. MOSL, its associates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities
mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities
functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already
available in publicly accessible media or developed through analysis of MOSL. The views expressed are those of the analyst, and the Company may or may not subscribe to all the views expressed therein. This document is
being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not
directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would
be contrary to law, regulation or which would subject MOSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to
certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or
representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
The
person accessing this information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSL or any of its affiliates or
employees responsible for any such misuse and further agrees to hold MOSL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this
information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022-3980 4263; www.motilaloswal.com. Correspondence Address: Palm Spring
Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad (West), Mumbai- 400 064. Tel No: 022 3080 1000. Compliance Officer: Neeraj Agarwal, Email Id:
na@motilaloswal.com,
Contact No.:022-30801085.
Registration details of group entities.: MOSL: NSE (Cash): INB231041238; NSE (F&O): INF231041238; NSE (CD): INE231041238; BSE (Cash): INB011041257; BSE(F&O): INF011041257; BSE(CD); MSE(Cash): INB261041231;
MSE(F&O): INF261041231; MSE(CD): INE261041231; CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412. AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset
Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth
management solutions. *Motilal Oswal Securities Ltd. is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. * Motilal Oswal Commodities Broker Pvt. Ltd. offers Commodities
Products. * Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products
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