Dr Reddy's delivers a bitter pill

Higher competition led to poor performance even as three plants remained under the US FDA scanner

Dr Reddy's performance for the June quarter was disappointing. Even as the Street expected a decline in the US sales given that the company has been grappling with FDA issues at its three plants, the actual impact was far worse. With other geographies (Europe and emerging markets) too disappointing, consolidated revenues at Rs 3,234 crore were 14 per cent lower that the year-ago quarter. Analysts were disappointed as the actual revenues were 19 per cent lower than consensus estimates of Rs 3,995 crore.

The company's Rs 2,664-crore global generics business declined 14 per cent y-o-y. About 60 per cent of the revenues from this business come from the US, where sales declined 16 per cent. This company attributed this decline to increased competition, pricing pressure and moderation in volume growth.

Competition in existing products has increased more-than-expected and in absence of new launches, growth has come under pressure. Analysts at Nomura had predicted about 3 per cent decline in North American sales with pressure on anti-viral Valcyte generics and other injectables. Nevertheless, some products such as the heartburn drug Nexium were expected to gain market share, but the company was unable to take advantage of the opportunities.

The company saw increased competition in Europe generics business (five per cent contribution to overall sales), where sales declined 16 per cent y-o-y. Sales in emerging markets too disappointed, declining 26 per cent given adverse currency movements and ceasing of Venezuela sales. Only Russia is holding up with growth of 23 per cent in constant currency terms. India sales (16 per cent to overall revenues) were helped by integration of recently-acquired UCB portfolio, leading to a growth of 10 per cent y-o-y. This growth could have been higher but for new product pricing notifications and WPI-based annual price decline impacting growth. The active ingredients (PSAI) segment (about 15 per cent of sales) is a lumpy business and that too declined 16 per cent y-o-y.

Thus, with competitive intensity increasing primarily in the US, Ebitda at Rs 400 crore was less than half of Rs 932 crore, expected by analysts, and net profits at Rs 126 crore was 78 per cent lower than the estimates of Rs 560 crore.

After the performance, the stock which has already fallen 5.8 per cent in last three trading sessions, shed another 4.37 per cent on Tuesday to close at Rs 3,322.85.

Going ahead, the company expects more product launches in September quarter, It launched generics of heart burn drug Zegerid a few days back. However, the resolution of FDA issues remains critical for new approvals and launches.