Dr Reddy's prospects hinge on FDA clearances

Non-US geographies grow well in Q2; cost controls support profitability

There is a bit of action and some good news for Dr Reddy’s Laboratories, even as its US sales continued to be under pressure. The drug major’s non-US business fared well in the September quarter (Q2). Its profitability, too, improved and helped the company meet expectations on the profit front.

The company’s North American sales, which contribute 40 per cent to its top line, declined 11 per cent year-on-year (y-o-y) and four per cent sequentially. The higher price erosion and channel consolidation continue to take a toll. However, the impact was partly offset by the launch of four products. Since the recently launched kidney treatment Renvela generics sales have not been recorded in Q2, expect benefits to flow in the December quarter. 

Dr Reddy’s India business, nearly a fifth of sales, after being impacted by the goods and services tax (GST)-led destocking in the June quarter, rebounded sharply and grew 36 per cent sequentially. Though the y-o-y growth is only two per cent, Sarabjit Kour Nangra at Angel Broking said it was more prudent to look at the sequential improvement, as some impact of the GST-related issues would have been felt in Q2 as well.

Emerging markets (15-16 per cent of top line) grew 14 per cent y-o-y. The European markets (five-six per cent share in revenue) recorded a 36 per cent y-o-y growth.

Better performance of non-US business and cost control buoyed profitability. While revenues at Rs 3,546 crore were down a per cent y-o-y and were way lower than the consensus estimates of Rs 3,714 crore, Ebitda (earnings before interest, tax, depreciation and amortisation) at Rs 689 crore beat estimates of Rs 620 crore. Net profits, down three per cent y-o-y at Rs 285 crore, were in line with the expectations.

The resolution of USFDA (US drug regulator) issues related to its three plants and approvals of major products for US launches are crucial. 

Thus, analysts do not see a significant improvement in FY18 earnings. But, if the plant clearances come through by the end of FY18, normalisation of operations may boost profitability.

Ranbir Singh at Systematix Shares expects the clearance of Dr Reddy’s Srikakulam plant by the end of FY18 to help improve profitability. But, any delay will postpone the benefits, he added.

Analysts at Motilal Oswal Securities (prior to results) said the stock would remain range-bound until there was more visibility on the key US launches (including oncology drug Aloxi, contraceptive Nuvaring, narcotic treatment Soboxone, and Copaxone 20mg and 40mg). 

Ranjit Kapadia at Centrum Broking said the overall Q2 performance was good and the US pricing pressure would ease in the coming quarters, but earnings upgrades were a few quarters away.