UBS's Caution on Dr. Reddy's Projections Signals Concerns
UBS's Caution on Dr. Reddy's Revenue Projections
In recent developments, UBS has embarked on a new journey by initiating coverage on Dr. Reddy's Laboratories (NSE: DRRD) with a Sell rating accompanied by a price target of INR 5,700.00. This cautious stance by UBS raises significant questions regarding the current consensus estimates for Dr. Reddy's US base business revenues.
Concerns Over US Revenue Predictions
UBS has expressed that the consensus revenue estimates, especially for Dr. Reddy's US base business by the fiscal year 2027, appear overly optimistic. The projected figure stands at $1.5 billion, which surpasses UBS's assessment by 20%, signaling a potential overestimation in market expectations.
One-Off Revenues and Market Adjustments
The firm emphasizes that the market has not fully considered the one-off revenue generated from the generic version of Revlimid (gRevlimid) that Dr. Reddy's recorded in fiscal year 2024. UBS estimates that the actual revenue from gRevlimid could range between $550 to $600 million, significantly higher than the consensus estimate of $450 million. This discrepancy suggests that the base business revenue in the US for FY24 may have fallen below $1 billion.
Future Projections and Realism
UBS indicates that the future expectation of an increase in base business revenue by $500 million over the next three years is quite optimistic and perhaps unrealistic. This calls for a reevaluation of growth expectations concerning Dr. Reddy's base business performance.
Impact of gRevlimid on Margins
Additionally, UBS has highlighted the substantial impact of gRevlimid sales on Dr. Reddy's overall margins. It is noted that gRevlimid constituted a striking 40 to 45% of the company's pre-R&D EBITDA in FY24. This major contribution leads UBS to adjust their earnings per share (EPS) estimates for Dr. Reddy's to be 16% lower than the prevailing market consensus.
Product Concentration and Market Risks
The analysis does not end there; UBS has also raised concerns regarding the product concentration in Dr. Reddy's base business. Notably, the top five drugs account for about 33% of the company's US revenue, with the largest being the generic version of Suboxone (gSuboxone), which alone comprises 15% of US sales.
Risks Posed by Competition
Given this high concentration, the firm warns that an influx of new competition for these primary drugs could present a tangible risk to both revenue and profit forecasts for Dr. Reddy's. As the market landscape evolves, maintaining a competitive edge becomes pivotal for sustaining growth and ensuring alignment with market expectations.
Conclusion: Navigating a Complex Landscape
The current stance from UBS sheds light on a complex and potentially challenging landscape for Dr. Reddy's Laboratories. As stakeholders digest this cautious outlook, it becomes essential to monitor market movements and emerging competition that could influence future performance.
Frequently Asked Questions
What rating did UBS give to Dr. Reddy's Laboratories?
UBS initiated coverage with a Sell rating.
What is UBS's price target for Dr. Reddy's?
The price target set by UBS is INR 5,700.00.
What revenue estimates did UBS find overly optimistic?
UBS believes the consensus estimate of $1.5 billion for US base business revenue by fiscal year 2027 is too high.
How significant were gRevlimid sales for Dr. Reddy's margins?
gRevlimid accounted for approximately 40-45% of Dr. Reddy's pre-R&D EBITDA in FY24.
What risks does UBS identify regarding Dr. Reddy's top drugs?
UBS warns that new competition for Dr. Reddy's top drugs could impact revenue and profit estimates.
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