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Credit Suisse Prescribes Underperform Rating For Dr. Reddy's With Drop In U.S. Sales


Credit Suisse downgraded Dr.Reddy's Laboratories Ltd (ADR) (NYSE: RDY) to Underperform from Neutral and cut its EPS outlook citing a sharp drop in U.S. sales and further risks from a high product concentration.

The key reason for Credit Suisse's cautious stance on the stock so far has been the high concentration of Dr. Reddy's top three products in the U.S., accounting for one-third of profits. However, the brokerage said this risk has been mitigated some with a hit to competitors' Valcyte, Vidaza and Sumatriptan.

Credit Suisse also expects competition in Fondaparinux in the second half (Teva and Aurobindo) and Metoprolol in fiscal year 2018 (Cadila, Intas, Wockhardt).

"Higher competition in these could lead to further downside," analyst Anubhav Aggarwal wrote in a note.

Furthermore, the analyst became bearish after a sharp 16 percent sequential decline in U.S. sales in the first quarter, the expiration in two quarters of the McNeil Consumer Healthcare contract, and an increase in R&D expense for Phase III trials for assets acquired from Xenoport and Eisai. Of note, the McNeil contract supply account was contributing $25 million to profit before tax and will impact the numbers.

In addition, lower over the counter sales for the Fexofenadine and Omeprazole store brands is also a concern.

"While lower OTC sales may recover, Teva entering its Sumatriptan auto injector will imply flattish U.S. sales for second quarter '17," Aggarwal highlighted.

As such, the analyst cut EPS estimate fiscal years 2017-18 by 35 percent and 19 percent, respectively.

In addition, the company's earnings recovery is expected to be back-end loaded in fiscal year 2017. The company expects a couple of large approvals in the U.S. in the fourth quarter. Aggarwal noted that one of these is likely to be cancer drug Gleevec, which could add $65 million annually. Drug approvals in the next couple of quarters are expected to be smaller.

Latest Ratings for RDY

Sep 2019UpgradesUnderperformOutperform
Jun 2019Initiates Coverage OnEqual-Weight
May 2019DowngradesOverweightEqual-Weight

View More Analyst Ratings for RDY
View the Latest Analyst Ratings

Posted-In: Credit Suisse Dr. Reddy’s LaboratoriesAnalyst Color Earnings News Downgrades Price Target Analyst Ratings


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