“Foreign (And Legal) Drug Trade Profits” — Dalal Street Insider

By Travis Johnson, Stock Gumshoe, November 30, 2009

On this bright and cheerful Monday we’re taking a look-see at a new entrant in the newsletter world — not only because it teases a couple intriguing investment ideas and promises great gains, as they all do, but because this is the first newsletter I’ve seen that is completely focused on India. Newsletters that look for profits in emerging markets, or in international stocks in general, are thick on the ground, of course, and there are even a few newsletters that specifically target China, but I’ve yet to see one that looks just for stocks in the Republic of India.

The justification for investing in India is quite clear, and has been for many years — it is the world’s second largest country, and the largest democracy, it is growing rapidly without being export-driven (and dependent) like China and the Asian tigers, and it has a bright demographic future — unlike China, Japan and, to a lesser extent, the United States, India is a country of young people.

Of course, the reasons not to invest in India are clear, too — the main one that I often hear cited is that it’s the world’s largest democracy, but also saddled one of the most bureaucratic and ponderous governments, with a horrifically out of date infrastructure in many areas. If you want roads and power lines and factories built quickly, choose a totalitarian regime over an impoverished and decentralized democracy. Dalal Street Insider tells us that the political woes are fading with the reelection of Manmohan Singh earlier this year, but progress is not necessarily etched in stone (Arundhati Roy is certainly catching some flak for calling Indian democracy “broken” by the thirst for economic growth, though if she’s right that “broken democracy” might be good news for India’s powerful corporations).

And investing in India has gotten significantly easier in recent years, with plenty of funds and ETFs now available in addition to a growing number of Indian stocks that trade in the US. It’s certainly not as high profile as China, though the shares of many of the stocks are up dramatically this year along with those of most of the other BRIC nations, but perhaps the stocks aren’t as inflated as Chinese stocks may be right now, either. Dalal Street Insider, edited by a guy named Ashish Advani, is trying to get itself off the ground with a special report called “Million Dollar Stocks: Three Indian Shares To Own Now!”

So what are they? Like all good newsletter promoters, they provide some nice clues for us. The one we’ll look at today is a pharmaceutical company …

“FOREIGN (AND LEGAL) DRUG-TRADE PROFITS!

“Little-Known, Overseas Drug Company Set For Triple-Digit Gains If Their New, Life-Saving Drug Passes FDA Trials…

“…And Still Projects High Double-Digit Gains In 2010 Even If The Drug Fails….

“The overseas drug company outlined in this letter had just received Phase 2 FDA approval for a new drug to treat one of the fastest growing diseases in the world (and no, it has NOTHING to do with swine flu).

“Frankly, I was skeptical at first. But after having dug through the stack of papers and did some further research – I realized that this company’s stock was quite literally a Gold-Plated Lottery Ticket – ready to be cashed in….

“This drug successfully cleared both Phase 1 and 2 FDA clinical trials…and we expect the announcement of the Phase 3 results in 2010.

“Since the big profits in new drug development come weeks…sometimes months before FDA Phase 3 approval, now is the time to grab your shares of this company’s stock.

“And if the results are positive for this new drug when it clears the Phase 3 trials as we expect based on our extensive research, this company’s stock value could shoot upwards for triple-digit gains literally overnight.”

Sounds pretty good, right? They go on a bit more, but the drug they’re talking about is a treatment for diabetes — and, as they note, India has been called the “Diabetes Capital of the World,” with more diabetics than any other nation on earth (and not just because of their large population — more on that here if you’re curious).

The biggest and most profitable market for diabetes drugs, or most other drugs, remains the US — so they make sure to note that we’re also a big market for this potential drug … and, after all, many of the drugs we take now, particularly generics, are manufactured in India already. Here’s a bit more:

“…. The company that created this new drug is right in the heart of India – “The Diabetes Capital” as one of every six diabetics in the world is Indian.

“Having diabetes (Type 1 and 2) can lead to serious health complications such as: blindness, kidney damage, cardiovascular disease, and lower-limb amputations.

“The secret to fighting diabetes is controlling blood sugar.

“And according to the CDC, 70% of adults diagnosed with diabetes take oral medications to help control their blood sugar levels, lipid levels, and cholesterol.

“But taking these oral medications brings great risks to their overall health – risks like:

“…heart failure…rapid weight gain…fluid retention…muscle pain…weakened bones…upper respiratory infection… sinus infections…headaches… and the list goes on.

“This new drug being tested is DIFFERENT. And although all the test results aren’t in, so far – it looks like this drug could have much less damaging side effects.

“And that is great news to the medical community and to company investors.

“Over the next few years alone, this new drug could be used to help treat 26% of the US population that are at risk to get diabetes because of a poor diet and lack of exercise – that’s 1 in every 4 Americans.”

That’s a nice start, indeed — but we’d like some specific clues … maybe even some numbers? And being a kind, generous new newsletter, they deliver …

“Not only is this Indian company at the forefront of diabetes research – it’s one of the world’s biggest and fastest growing manufacturers of generic drugs.

“Better yet – because of the worldwide economic recession, the demand for generic drugs continues to rise. People are switching from expensive brand-name drugs to generics at an alarming rate – why? So they can save money.

“But it gets better, because not only does this 25 year old company lead India’s domestic market – it’s also a major player throughout the world, including the US, providing many of the generic drugs you and I have in our medicine cabinets.

“Smart investors are piling into this economy. They’re looking at the financial numbers and taking action. And if you’re as smart as they are (…and I suspect you are), you’ll agree this company is an impressive “beast” positioned for massive growth.

“It already has over $1.4 billion in worldwide sales so far in 2009.

“Export sales have skyrocketed from 40% in 2000 to 85% in 2009.

“And it has recently announced a synergistic alliance with an industry leader – which will explosively increase sales of this company.

“BREAKING NEWS!

“The ‘industry leader’ I just mentioned above is currently in negotiations to buy a 5% stake in this Indian pharmaceutical company. Once this is confirmed and the ties between these two drug companies deepen further – this stock can easily TRIPLE in the next 12-36 months. Now is the time to purchase this stock!”

Now those are some clues! The mighty Thinkolator is a bit rusty — and frankly, a bit coated with gravy still after some holiday gluttony — so it’s good that we needn’t work it overly hard to reveal that this is …

Dr. Reddy’s Laboratories (RDY — click here for a free instant analysis)

The clues all fit quite perfectly — RDY was founded in 1984, 25 years ago (by Dr. Reddy, naturally), it had over $1.4 billion in sales in their 2009 FY, which just ended last quarter. They also do have a marketing deal with an “industry leader,” which happens to be GlaxoSmithKline, and GSK is also reportedly in negotiations to buy 5% of the company from the founding family (which owns about a quarter of the shares still).

RDY has actually been a rumored takeover target several times in recent years, since it would be a nice fit for any of the big pharma companies that are looking for a big boost to their generic business, and it seems likely that those rumors are part of the background for the stock’s recent advance — the shares are up almost 50% over the last three months.

Dr. Reddy’s is a nice business, to be sure — they are growing, they have a very low cost manufacturing base and a low-cost research arm, thanks to cheap labor (including cheap chemists and researchers) in India, and they have a very large slice of the Indian generic drug business to go along with their strong global position in that sector, and their pipeline of potential branded drugs. Those branded drugs include the diabetes treatment that was teased in this letter, which is their only proprietary drug that’s currently in Phase III trials — it’s called Balaglitazone. Balaglitazone was initially licensed to Novo Nordisk more than ten years ago, but was put on hold by them after an initial bit of clinical study and reverted to Dr. Reddy’s in 2004. They’re developing it with a partner, but still hold the rights for India and the US, so if this does turn into a world-beater diabetes drug it might end up being a big deal.

Still, there’s a reason why analysts wouldn’t necessarily price the shares based on this potential — they still have a ways to go in proving the safety of the drug, and a related drug that was also outlicensed to Novo Nordisk was dropped in Phase III trials due to a surprising cancer risk — I don’t know anything about the science, or if this should be a worry, but “in Phase III” is, at least, quite different from “approved.”

RDY trades right now at a forward PE of just about 18 according to consensus analyst estimates, which makes it substantially more expensive than Teva (TEVA — forward PE of 11), the gold standard in global generic drugs … but it’s also far, far smaller and thus you might argue that it will have an easier time growing dramatically than Teva will, Teva is a $50 billion company, Dr. Reddy’s has a market cap of about $4 billion. To be fair, Teva is growing faster than Dr. Reddy’s as of this most recent quarter, and it’s also a bit more efficient. RDY depends heavily on exports of generic drugs, primarily to the US, Germany and Russia, but it should also do well as India’s domestic drug market grows — they have a good local distribution network and an established brand at home, so to some degree they’ll probably grow along with the Indian middle class.

And if you think about the major concerns impacting the big global pharmaceutical companies in the US, everyone’s largest market, you start to think more fondly of Dr. Reddy’s (and Teva, and Novartis’ big generic arm, among others): When analysts talk about Pfizer or GlaxoSmithKline or Merck the concerns are always about patent expiration … and every time a big drug like Lipitor loses patent protection, a company like Dr. Reddy’s has the opportunity to jump into a very large, established market with a minimum of R&D spending and no real marketing costs. And when folks worry about the cost of prescription drugs in the US as we discuss health care reform, one of the oft-mentioned solutions is an increase in the use of generic drugs — again, to the benefit of the generic drugmakers. So there are, at least, some significant trends that play into the hands of all the major players in generic drugs, all of whom are expected to grow pretty nicely in the years to come. Both RDY and TEVA trade at a PEG ratio (Price/Estimated Earnings/Projected Growth) of close to 1, so in that way they are similarly valued, and arguably undervalued, based on their potential growth.

I wouldn’t necessarily buy Dr. Reddy’s as a bet on the potential of their diabetes drug alone, since that’s a small part of their focus and approval and market acceptance are never sure things, but they do seem to be a fair bet on low-cost generic drugs in general — the shares still look a little expensive to me given the recent enthusiasm, but that might just be the orneriness talking. If you’ve got a feeling about Dr. Reddy’s or their competitors, feel free to let us know with a comment below.

And there are two other gazillionaire-maker Indian stocks that we’re teased with, but I’ve taken so much of your time already that we’ll have to look into those later in the week — more on Dalal Street Insider and other Indian investments as I get a chance to review the other teases, have a lovely week!


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3 Comments on "“Foreign (And Legal) Drug Trade Profits” — Dalal Street Insider"

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SageNot
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SageNot
November 30, 2009 2:13 pm

http://finance.yahoo.com/q/ta?s=RDY&t=1y&l=on&z=m&q=l&p=m50,m200&a=m26-12-9,r14,ss&c=

On first blush you’d think that the “MO” in this stock is still in force.

Look again, all 3 trending indicators have turned down. So this analyst wants his readers to buy Hi (& reward his earlier readers who bought lower maybe), or you could just mark me down as being cynical. WHO, ME?

Devvo
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Devvo
November 30, 2009 2:58 pm

I agree with SageNot it does not look like a good stock , just going up and down , no real growth

Sam Godambe
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Sam Godambe
December 5, 2009 2:30 pm

I agree with all, however the RDY price has gone almost five times compared to the price gone up of TEVA. Therefore the question is, will it continue the same ratio? Or it is time for RDY to pull back and slow down.

By the way, just for information, the “Dalal Street” is an equivalent to “Wall Street” in Mumbai.

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