A lacklustre German generics business environment could render betapharm, the German arm of Dr Reddy’s, a drag on the Hyderabad-based drug major’s FY08 earnings.
HYDERABAD: A lacklustre German generics business environment could render betapharm, the German arm of Dr Reddy’s, a drag on the Hyderabad-based drug major’s FY08 earnings, analysts watching the company said.
This is all the more worrisome in the backdrop of the loss in the litigation for the rights to market the generic version of anti-ulcer drug Aciphex (generic rabeprazole) — with a US district court upholding the enforceability of Japanese firm Eisai’s patent.
Rabeprazole is an oral drug used in the treatment of conditions caused by acid and is in a class of drugs called proton-pump inhibitors (PPIs) which block the enzyme that produces digestive acid in the stomach. This allows ulcers in the stomach and esophagus to heal. A win on Aciphex, which has sales of $1.3 billion in the US, would have implied a $75-100 million profit opportunity would have provided an ample buffer from the FY08 earnings decline as also the worsening profitability in the German generics business.
Betapharm is facing significant pressures given the price cuts, direct negotiation between insurance companies and suppliers. According to Anshu Govil, an analyst at brokerage firm CLSA, it poses a 20% earnings risk for the parent during the year.
Betapharm’s gross profit accounts for 80% of Dr Reddy’s FY09 consolidated net profit. According to CLSA estimates, 1% decline in betapharm gross margins impacts overall DRL net profit by 1.5%. A decline in margins to 50% from current assumption of 55%, coupled with lower- than-assumed revenues, can potentially lead to up to 20% downgrade in overall company earnings, the brokerage said in a research report.
A Dr Reddy’s spokesperson said the company was exploring all possibilities — including the option of going in appeal against the US district courts ruling in the case. But a decision is yet to be taken though all necessary procedures for a USFDA approval for the generic Achiphex are being carried out, she said. Dr Reddy’s shares dropped almost 5% at Rs 651.25 on the BSE on Monday while Eisai shares recorded the biggest gains in six years on the Tokyo Stock Exchange.
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