Dr Reddy's slips over 10% post June quarter results, anonymous complaint

Shares of Dr Reddy’s Laboratories (DRL) hit over three-month low as they fell over 10 per cent to Rs 4,844 levels on the BSE on Tuesday, after the company reported a 1 per cent year-on-year (YoY) decline in its consolidated net profit at Rs 570.8 crore in the June quarter (Q1FY22). The drugmaker had posted a profit of Rs 579.3 crore in the year-ago quarter. The stock was trading at its lowest level since April 19, 2021. Meanwhile, an anonymous complaint against the company also created panic among investors.

Ebitda (earnings before interest, taxes, depreciation, and amortization) margins were down 560 basis points (bps) YoY and 310 bps sequentially at 20.7 per cent during the quarter. Gross profit margin decreased by 380 bps over the previous year and 150 bps sequentially, majorly on account of price erosion and increase in inventory provisions related to few products.

The company’s revenue grew 11 per cent YoY at Rs 4,919 crore as against Rs 4,418 crore in the corresponding quarter of the previous fiscal. India revenue grew 69 per cent YoY, higher than Street's estimates, aided by better traction in the chronic segment and the addition of the Wockhardt portfolio.

However, North American sales were up in single-digit or 1 per cent at Rs 1,739 crore. Analysts had expected double-digit growth from the US sales. The sequential decline of 1 per cent was on account of price erosion in some of the products partially offset by volume traction and new products launched, the company said. CLICK HERE FOR FULL DETAILS

Anonymous complaint

Meanwhile, according to reports, Dr Reddy’s Labs has commenced a detailed investigation into an anonymous complaint. The complaint alleges that healthcare professionals in Ukraine and potentially in other countries were provided with improper payments by or on behalf of the Company in violation of U.S. anti-corruption laws, specifically the U.S. Foreign Corrupt Practices Act. A US law firm is conducting the investigation at the instruction of a committee of the Company's Board of Directors. 

"The Company has  disclosed the matter to the  US Department of Justice, Securities and  Exchange Commission ("SEC") and Securities Exchange Board of India, and on 6 July 2021 the Company received a subpoena from the SEC for the production of documents pertaining to certain ClS geographies, and the Company is in the process of responding to the  same. While the matter may result in government enforcement actions against the Company in the United States and/or foreign jurisdictions, which could lead to civil and criminal sanctions under relevant laws, the probability of such action and the outcome are not reasonably ascertainable at this time," the report suggested. READ ABOUT IT HERE

However, the brokerage firm DART Research said it continue to remain positive post the results. Fundamentally, nothing has changed in the company. Q1 margins have seen 250bps miss, but it has been in line with our expectation on earnings (we expected Rs 5.9 bn).

With products like Vascepa launched during end of Q1, US aren’t reflecting the entire picture.  Optionality from Revlimid remains.  The brokerage firm believes Vascepa and Kuvan are each $30-40mn opportunity.

"As mentioned in their annual report, price erosion intensity has lowered to 6 per cent Vs 13-14 per cent YoY.  Besides, the annual charge backs and rebates have lowered to 25-26 per cent in FY21 Vs 40 per cent during FY16-18. Besides, the sub peona should get settled and penalty payment shouldn't be higher as we have seen in cases like Sun Pharma or precedent companies," it said.