Limited-competition products boost Dr Reddy's performance

Good growth across regions, especially the US, sustained double-digit domestic growth & improving margins aid show

After disappointing the Street in the March quarter, Dr Reddy’s Laboratories' (DRL's) performance for the quarter ending June has come as a pleasant surprise.

Following the results, its stock closed with gains of a little over two per cent at Rs 2,822.25 on Wednesday.

Sales at Rs 3,518 crore were up 23.6 per cent over a year, better than the Bloomberg estimate of Rs 3,470 crore. The Ebitda (earnings before interest, taxes, depreciation and amortisation) margin for the June quarter, at 25 per cent, were better than the 20 per cent in the year-ago period and 22.8 per cent in the March quarter -- and higher than the expectation of 21.8 per cent. At Rs 888 crore, Ebitda and net profit at Rs 550 crore were way ahead of the Street estimates of Rs 757 crore and Rs 513 crore, respectively.

These numbers were due to improved performance in most places. Sales in North America grew 51.5 per cent (versus 31 per cent in the March quarter), driven by niche and limited-competition generics products such as Toprol XL (anti-hypertensive), Zenatane (acne control), Geodon (anti-psychotic) and the injectibles segments. Since North America contributes 47 per cent to revenue, it had a strong influence on overall performance.

The Russia and CIS region, an important market for Dr Reddy’s, contributing almost 14 per cent to revenue, saw sales increase only eight per cent, largely due to currency impact and subdued sales in Ukraine. Russia-based sales in rouble terms grew 18 per cent.

Sales in the rest of the world (6.5 per cent of the total) marked a robust growth of 50 per cent over a year, led by sales in Venezuela.

Despite various issues facing the domestic industry, DRL's India sales continued to grow in double-digits. Sales here (a seventh of overall revenue) had grown 18 per cent in the March quarter; it grew 14 per cent in April-June.

The Pharmaceutical Services and Active Ingredients segment saw a fall of six per cent but this was much better than the 22 per cent decline in the previous quarter.

In the medium term, analysts believe DRL’s robust performance will continue, led by a strong pipeline of limited-competition products, with big launches expected from the end of this financial year. The company had launched 25 new generic products in the June quarter. Geodon generics continue to gain market share from Apotex and Pfizer, with market share up to 40.5 per cent, says a Nomura report. The injectables range is also gaining regular traction.

Analysts at Axis Capital say though there are no obvious big launches scheduled for FY15, the focus on injectables adds comfort on long-term growth. The company is expected to launch more mega injectables (including complex generics) from FY16. The Axis analysts add that complex generics would contribute 38 per cent of revenue in FY16 (from 27 per cent in FY14), led by the Copaxone (used for strengthening the immune system) and Diprivan (neurological product) generics.

The focus on complex products has also reduced dependence on exclusivity opportunities. Apart from launches in this segment, analysts are watching the developments in biosimilars.

Sarabjit Kaur Nangra of Angel Broking says she is not looking at earning upgrades at present. The stock trades at attractive valuations compared to peers that have seen a larger run-up on the bourses. She maintains her ‘Buy’ rating on the stock, with a target price of Rs 3,399. The consensus target price among analysts polled by Bloomberg this month is Rs 3,056.