Dr Reddy's: Betting on Betapharm

Dr Reddy’s Laboratories (DRL) believes it can grow revenues by 25 per cent in the current year from Rs 5, 006 crore in FY08. Some of that will come from a weaker rupee but adverse currency movements could hurt the bottom line — forex losses in the September 2008 quarter were Rs 296 crore.

Moreover, the company’s performance in Germany will be crucial; Betapharm, a firm that DRL bought over in February 2006, fared reasonably well in the September quarter with revenues up 68 per cent y-o-y (in rupee terms) at Rs 2,800 crore, though that included some one-time sales.

However, it remains to be seen whether DRL is able to win contracts floated by the insurance firms---worth two billion euro-- which have enormous clout in that market. Also, Germany has seen some fairly steep price cuts.

Betapharm’s performance helped boost DRL’s revenues which grew a robust 28 per cent Rs 1,615 crore. Revenues were also driven by the global generics business which grew by 40 per cent thanks to a good performance in key markets such as North America, Russia and Europe.

DRL continues to strengthen its pipeline by filing abbreviated new drug applications (ANDAs)—it filed two during the quarter, taking the total pipeline to 66, among the strongest in the industry. The company will be selling Imitrex (anti-migraine medication) exclusively in FY09 , though it’s not clear for how long the exclusive period will last.

DRL’s domestic formulations business grew at a disappointing 9 per cent y-o-y in the September quarter because of delays in product launches which the company believes would be resolved in the third quarter. The company’s operating margins rose by 270 basis points to 14.4 per cent thanks mainly to lower expenses on sales and R&D and the trend should sustain.

The net profit, adjusted for tax write-backs in the September 2007 quarter, rose 19 per cent to Rs1,212 crore. The DRL stock may have outperformed the Sensex since the start of the year but has nevertheless lost 43 per cent. Net profits are expected to grow by about 15 per cent in the current year over Rs 468 crore in FY08.