Dr Reddy's: Price erosion in US, rouble devaluation impact sales growth

H2 expected to be better on back of launches, limited competition

Dr Reddy’s September quarter numbers were lower than the Street’s expectations due to muted growth in the US and a sharp fall in the Russia business, resulting in revenues growing seven per cent year-on-year to Rs 3,588 crore versus consensus estimates of Rs 3,740 crore. Revenue growth in the US, its largest market contributing 40 per cent to top line, came in at eight per cent.

While the firm has been gaining market share in the US in key products, entry of new players has meant severe price erosion, resulting in lower US revenue growth. Further, in the September quarter last year, it had four new launches compared to a single launch in the September 2014 quarter. Also, last year, it was the sole generic player in anti-cancer drug decitabine and donepezil used in treating Alzheimer's disease, which boosted margins in US business.

Both analysts and the company say the second half will be better than the first, given the US launches. The firm said on Tuesday it had launched Sirolimus, which has a market size of $206 million. Last month, it had launched Levalbuterol inhalation solution used in treating lung diseases with a market size of $270 million.

Sales to Russia fell 11 per cent due to the devaluation of rouble. Operationally, the firm continues to do well growing faster than the market in the value and volume terms. The company indicated the impact of currency devaluation in Russia and Ukraine led to a two per cent impact on overall revenues. India outperformed the industry, growing 14 per cent thanks to new launches and volume expansion.

The rest of the world markets had a good quarter with revenues growing 56 per cent largely due to good performance in the Venezuela market.

The company has been able to stem the falling sales of the pharmaceutical services and active ingredients, which reported flattish sales for the quarter. The segment reported sales of Rs 639 crore. Reduction in low-margin products, improving product mix with more complex API products will boost margins.

Muted top line performance, especially in Russia and the US, coupled with increase in research expenses saw Ebitda margins decline 245 basis points to 22.7 per cent. R&D costs were up 37 per cent to Rs 411 crore and were at 11.5 per cent of revenues against nine per cent in the year-ago quarter. Thus, profits came in lower than estimates, albeit marginally, at Rs 574 crore.