Dr Reddy's: Growth story postponed, outlook healthy

Numbers fell short of expectations on weak US show but given the pipeline, growth should pick up soon

In a season of disappointing results, Dr Reddy’s Laboratories made its contribution by reporting profits about 10 per cent lower than market expectations. The pharmaceutical major reported a profit of Rs 378 crore as against hopes of Rs 424 crore. As a result, the stock was battered. It fell almost five per cent over two sessions to Rs 1,811.

The US business posted a turnover of $178 million, lower than the $187 million in September 2012 quarter. This was despite a ramp-up taken by the company in the second quarter. On a year-on-year (y-o-y) comparison, while sales grew 23 per cent (ex-Olanzapine, for which Dr Reddy’s earned exceptional profits in the previous year), profit before tax grew 17 per cent only due to price erosion in key products.

Along with the US, European markets were also affected, with sales falling 20 per cent y-o-y, mainly on account of intense competition in Germany and the company reducing participation in the less remunerative tender business. Positively, the Russian business grew 32 per cent, largely on account of seasonal factors and new launches. The Indian formulations market grew 12 per cent, in line with the industry growth.

The other key segment is pharmaceutical services and active ingredients (PSAI), which grew 28 per cent y-o-y to Rs 713 crore but was affected by lower prices, resulting in margin squeeze.

On the whole, and partly due to higher overheads and research and development (R&D) spend, the company’s operating profit margin fell to 16.5 per cent from 18.2 per cent in the previous quarter, against market expectation of 18.8 per cent (y-o-y is not strictly comparable on account of Olanzapine).

While the results have been below expectations, Dr Reddy’s growth has been pushed forward. The company is confident of catching up on lost growth post-approval of key products and a series of launches across all markets.

It is targeting 30 per cent of new filings to come from low competition/complex products like peptides and complex injectables, for which it is increasing its R&D spend to a over seven per cent from current levels of 6-6.5 per cent of sales. In terms of global markets, the US and Russia will be key to growth. In the Indian and emerging markets, it is looking at the biosimilar segment as growth driver and expects a turnover of Rs 100 crore in FY13 from it. The company is rightly placed and has the first-mover advantage to launch these products.

Given the launch of niche products in the US, though delayed, and pick-up from other markets, Dr Reddy’s can post better performance, going ahead.