Dr Reddy's: Pink in US, sickly at home

Even as US sales grew at a good pace, lower-than-expected performance in other geographies impacted Q1 numbers

Dr Reddy's Laboratories disappointed the Street with revenues, profits and margins coming below expectations. The stock, which had fallen 5.4 per cent in the previous three sessions, fell another 1.7 per cent to close at Rs 2,179 on Tuesday after the results. The revenues at Rs 2,845 crore in the June quarter grew 12 per cent year-on-year, but were much lower than the consensus Street estimates of Rs 3,149 crore (according to Bloomberg). This can be attributed to a fall in the European revenues, mainly Germany, flat domestic growth and lower-than-expected performance in Russia & CIS (former Soviet republics) markets and in the pharmaceutical services and active ingredients (PSAI) business.

Lower revenue growth also impacted Ebitda margins, which at 18.6 per cent were not only below expectations but also lower than 19.8 per cent in the June 2012 quarter and 21.5 per cent in March 2013 quarter. Consequently, even as net profit at Rs 361 crore grew 18.2 per cent, the same was much lower than consensus estimates of Rs 436 crore.

Though the US growth at 37 per cent and a strong product pipeline provided the silver lining, poor performance in all other geographies disappointed analysts. While Ranjeet Kapadia at Centrum Broking said that European fall, slow Russian business growth and flat domestic performance has disappointed him, Hitesh Mahida at Fortune (who is neutral on the stock) said that he may revisit his estimates as he was expecting better US growth.

While analysts see comfort in the strong US product pipeline, they believe lower growth in non-US markets may impact the prospects in the near term and, hence, should reflect on the stock as well.

Disappointing segments
The PSAI segment that accounted for 21 per cent of total revenues grew only six per cent year-on-year due to lower number of "launches undertaken by its customers".

However, the major disappointment in the global generics segment came from geographies like Russia & CIS, Europe and rest of the world as well as India. Generic business contributes 77 per cent to Dr Reddy's overall revenues. Out of this, the above-mentioned geographies account for 50 per cent revenues, while remaining 50 per cent comes from North America, primarily the US.

Russia and CIS, which contribute 20 per cent to revenues, could grow just 7.7 per cent, with Russia (the larger contributor) growing just four per cent. While the company attributes this to seasonality, a large part of this is also due to the high base of last year.

Domestic sales, a sixth of generic sales at Rs 349 crore, remained unchanged compared with Rs 348.2 crore in the year-ago quarter. The company attributes this to the destocking activities undertaken at the stockist level due to implementation of new pharma pricing policy and Maharashtra trade strike. However, the concerns aggravate if one looks at the IMS data which shows that the pharma market has grown 13.9 per cent, 6.8 per cent and 8.9 per cent (year-on-year) during April, May and June 2013, respectively.

The European market that contributed seven per cent of the generic business fell substantially. At Rs 160 crore, the revenues declined 66 per cent year-on-year as majority of the sales (Rs 110 crore) come from Germany (down 28 per cent). The company's ordeals in Germany continue after the Beta Pharma acquisition had failed to give desired results.

US: On a strong footing
The only silver lining for the company comes from North America. Sales from the region at Rs 1,087 crore have grown a good 37 per cent. The company's launches such as Montelukast granules for asthma treatment, Finasteride (for prostate), Isotretinonin (for acne), Zoledonic acid (for osteoporosis) and Metoprolol extended release (for hypertension) continue to do well. New launches such as Zelodronic acid injection and earlier launch of Fondaparinux injections continue to drive injectibles' (a niche segment) revenues. The company has also got approval for another injectibles launch for treatment of MDS, likely to contribute $23 million to revenues in FY14, according to Karvy estimates.

The launch of Propecia (hair-loss drug) on an exclusivity basis continues to do well, with the drug commanding a 81.1 per cent market share.

Dr Reddy's US pipeline remains strong. The company has filed two new abbreviated new drug applications (ANDA) during the quarter. In all, 64 ANDAs are pending approval and eight are likely to have first-to-file status that will give Dr Reddy's exclusivity on launches. These should help drive growth for the company. However, until sales pick up in other geographies, it will prove a drag on overall numbers.