Indian generics pharmaceutical major Dr Reddy's Laboratories’ performance for the quarter ended June has been below expectations on all counts.
While the company’s US
business is under continuous pricing pressure, the India
business, impacted by de-stocking before the goods and services tax (GST) came into effect, added to its woes.
generic sales, which contribute 45 per cent to the firm’s revenues, fell 4 per cent year-on-year while India
formulations sales (generating 14 per cent of its revenues) declined by 10 per cent.
Generic sales in Europe (about 6 per cent of revenues) and emerging markets (17 per cent) grew by 28 and 34 per cent, respectively, providing some respite, and helping global generics’ revenues increase 3 per cent to Rs 2,745 crore.
However, their relatively small contributions mean that they were not enough to drive overall revenues.
Sales at Rs 3,316 crore (up 3 per cent year-on-year, down 6.7 per cent sequentially) came lower than the Bloomberg consensus estimates of Rs 3,443 crore.
“Our first-quarter results have been below expectations. While headwinds in the form of price erosion due to US
customer consolidation continue, a lower contribution from new product launches in the US
and the GST implementation in India
also impacted our performance,” Dr Reddy's Co-Chairman and Chief Executive Officer GV Prasad said.
Revenues from pharmaceutical services and active ingredients (PSAI), too, marginally declined by 1 per cent at Rs 465 crore as compared to Rs 469 crore in the corresponding previous quarter.
The disappointment was more profound at the operating level. The declining US
revenues and increasing competition were bound to impact margins. The company said that US
revenues declined mainly owing to higher price erosion, and increased competition in its key products, namely Valgancyclovir (anti-viral) and oncology drugs Decitabine, Azacitadine, etc, which was partly offset by the launch of four new products.
Rising selling and general expenses, R&D costs, and other expenditure also led to margin pressure. The gross profit margin at 51.6 per cent declined by 460 basis points over that of the previous year (56.2 per cent). The Ebitda margins at 10.1 per cent came 240 basis points lower year-on year and about 760 basis points sequentially, which was a big disappointment. With the 17.7 per cent Ebitda margins in the March quarter, the street was not expecting such a sharp decline.
Ebitda at Rs 336 crore was far lower than the Rs 644 crore indicated by consensus estimates. Net profit at Rs 59 crore, down 53 per cent year-on-year, was significantly lower than the Rs 297 crore indicated by consensus estimates.
With this performance, the Dr Reddy’s stock closed 3.29 per cent lower at Rs 2,621.45 levels on Thursday.
Admitting that the first-quarter represented the worst performance by the company ever, Saumen Chakraborty, president and chief financial officer, Dr Reddy's, said the firm expected an improvement in the coming quarters as the GST impact is largely limited to the June quarter. The company hopes to launch 10-15 new products in the US
in FY18. Mukherjee, however, said the challenges of price erosion continued due to channel consolidation.
Analysts such as Ranvir Singh at Systematix Stock Broking say that the recent data indicate that competitive intensity in the US
is not increasing further. This is another positive. However, for a significant improvement in performance, getting its three plants under the US
FDA’s “warning letter” since November 2015 cleared holds the key. This is not only necessary for revenue growth
but margin improvement also. The company has not guided for any timeline for complete resolution of FDA issues, but analysts feel that the resolution should come in FY18 and hence see an earnings upside from FY19. Singh says that he will maintain his forward estimates expecting a resolution in next three quarters.
Analysts at HDFC Securities say that they continue to have the ‘neutral’ rating on the stock as pain in US
market is likely to continue for 2-3 quarters. The only key trigger in the near term would be the management's commentary on the Copaxone launch.