Dr Reddy's Labs shines among pharma stocks, wins investor confidence

Cost-optimisation and growth strategy have helped Dr Reddy’s Laboratories (DRL) to buck the trend and win investor confidence. The Hyderabad-based company is an outlier among large pharmaceutical producers, having seen a jump in its stock price over the previous year.

While the BSE healthcare index and Nifty pharma index have declined on both a year-on-year and year-to-date basis, the DRL stock has gained 8.5-9 per cent in that period. With Divis Laboratories, it is the only stock in the Nifty pharma index which gained in the preceding months.

The prospect of improved profitability is seen by analysts as giving heft to the stock price. Stricter cost control due to product rationalisation and sale of a manufacturing facility in the US has helped. 

“We have been focusing on improving our productivity and cost optimisation across businesses. We will continue to focus on self-sustainability for each of our businesses,” a DRL spokesperson said.

These moves come as DRL adjusts to the changing market environment in the US market. Price erosion and channel consolidation impacted the profitability, while adverse observations from regulators has led to delayed product approvals. The company’s growth strategy is now led by Erez Israeli, elevated in August as chief executive officer.

“Overall we feel market conditions are favourable for us to grow,” he said. Growth will be driven by new product launches in the US and scaling up of businesses in India, China, Russia and other emerging markets. The company refused to comment on stock price movement.

In this financial year’s first quarter, it had introduced 10 products in the US market; it expects to launch another 20 there in 2019-20. Sales in the US rose three per cent in the first quarter from a year before and nine per cent from the earlier quarter. Net profit in the first quarter increased 45 per cent from a year before to Rs 663 crore , due to rise in other incomes.

“Reported earnings have benefited from cost saving measures, growth in India and other emerging markets. However, we believe the stock has already priced in these favourable factors and the current stock price reflects that. Sustained stock price 

performance now depends upon quick approvals of key products like Copaxone and NuvaRing,” said Anmol Ganjoo of JM Financial Securities.

Till now, the US Food and Drug Administration has refused to clear DRL’s application for generic copies of multiple sclerosis drug Copaxone and birth control device NuvaRing. DRL says it is preparing a response to the regulator’s decision and is optimistic of launching these products.