UBS has initiated coverage on Dr. Reddy's Laboratories, (NSE: DRRD), with a Sell rating and a price target of INR 5,700.00.
The firm expressed concerns over the current consensus estimates for the company's US base business revenue, suggesting that the figures are overly optimistic.
UBS pointed out that the consensus revenue estimate for Dr. Reddy's US base business by fiscal year 2027 appears too high at $1.5 billion, which is 20% more than UBS's own estimate.
The firm believes that the market is not fully accounting for the one-off revenue from the generic version of Revlimid (gRevlimid) that Dr. Reddy's booked in fiscal year 2024.
According to UBS, Dr. Reddy's likely generated higher gRevlimid revenue in FY24, between $550-600 million, compared to the consensus estimate of $450 million.
This, UBS argues, indicates that the base business revenue in the US for FY24 was under $1 billion. The firm suggests that it is unrealistic to expect the base business to increase by $500 million in the next three years as implied by the consensus.
The impact of gRevlimid sales on Dr. Reddy's margins was also highlighted. UBS estimates that gRevlimid accounted for 40-45% of the company's pre-R&D EBITDA in FY24. This significant contribution leads UBS to project that their earnings per share (EPS) estimates for Dr. Reddy's are 16% lower than the market consensus.
Furthermore, UBS raised concerns about the high concentration of products in Dr. Reddy's base business, noting that the top five drugs represent about 33% of the company's US revenue.
The largest among these, the generic version of Suboxone (gSuboxone), makes up 15% of US sales.
UBS warns that new competition for these top drugs could pose a risk to their revenue and profit estimates for Dr. Reddy's.
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