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Dr Reddy's disappoints the Street

US biz sees sequential dip in revenues despite new product launches

Dr Reddy’s Laboratories
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The market was hoping to see a good set of numbers from from Dr Reddy’s Laboratories in Q1FY13, as the company was expected to resolve some of the issues it has been facing in the domestic market. Apart from growth pangs in the home market, the stock has underperformed the Sensex by a wide margin year-to-date due to delays in generic launches in the US.

Though the company has managed to grow its business in India by 19 per cent, which is ahead of the industry’s growth, Dr Reddy’s has faltered in the US market. The

US accounts for 50 per cent of the company’s formulations business, which in turn accounts for 75 per cent of net sales.

Though the company’s revenues from the US grew 27 per cent year-on-year (y-o-y) to $143 million, there’s a sequential decline of 17.3 per cent. Analysts say this is a cause of concern as Q1 also saw new product launches of clopidogrel, OTC lansoprazole, ziprasidone, and quetiapine. The reason for this performance in the US market is due to the y-o-y price declines in the existing product basket. Five new products were launched during the quarter. including 300 mg, which was launched under a 180-day exclusivity.

A section of analysts, that is not very positive on the stock, also believe the delay in the launch of Lipitor to be a worry. Going by the current run-rate of $143 million, Emkay Global says, “With $143 million of US revenues in

Q1FY12, the management’s guidance of $900 million for FY13 seems very difficult. The 38 per cent growth in US sales at $143 million (assumed exchange rate of Rs 56) was below our expectations.”

If the company wants to meet its $900 million forecast it will have to average US sales of $250 million for the remaining three quarters this year, which analysts believe is very steep. While there’s concern over the sales run-rate in the US, the domestic market concerns seem to have eased. A growth of 19 per cent in India is a sign of revival, as the industry has grown 16 per cent.

Apart from concerns on US sales, the Street will want clarity on gross margins, which have declined by 200 basis points to 57 per cent. Base Ebitda margins declined 121 basis points q-o-q due to increase in SG&A (selling, general and administrative) expenses by 24 per cent y-o-y. Management commentary on how these expenses are likely to pan out will ease some of the concerns, going forward.

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