In US, competition for Dr Reddy's intensifies

Resolution of US regulatory issues remains the biggest trigger for the stock

Dr Reddy's performance for the December 2016 quarter (Q3) came ahead of estimates. At first sight, some sequential improvements may excite investors. Net profit at Rs 470 crore was way ahead of Rs 377 crore indicated by Bloomberg consensus estimate. Operating profit at Rs 879 crore beat estimate of Rs 707 crore, even as revenue at Rs 3,707 crore came in slightly lower than expectations of Rs 3,726 crore. Profits exceeding estimates need to be seen in the light of the September quarter, which had spawned subdued expectations. Also, the higher-than-expected operating profit got lift from new launches and cost controls. What's more, the company has weak expectations for March quarter.

The impact of the US regulator's letters on three India-based plants continued to weigh on US sales. While global generics sales were up six per cent sequentially, they were nine per cent lower year on year, primarily on a decline in sales contribution from North America (mainly US). The geography contributed 45 per cent to overall sales and saw a 15 per cent year-on-year decline in revenue. Dr Reddy's said this was primarily on account of increased competition in generics of anti-viral Valcyte tablets and injectables franchise, coupled with pricing pressure. Slower approval rate and lack of mega launches due to US regulatory issues also led to decline in revenue. The company launched five products, which led to a three per cent sequential growth in US sales.

Pressure in emerging markets continued, due to weak contribution from Venezuela. While emerging markets' sales declined seven per cent year on year during the quarter, excluding Venezuela, sales were up only seven per cent.

India sales (16 per cent of revenue), too, saw two per cent growth versus expectations of 10-12 per cent, even after analysts had factored in demonetisation. Pharmaceutical Services and Active Ingredients or PSAI (14 per cent of revenue) reported a six per cent year-on-year growth. PSAI growth typically remains lumpy.

With disappointments from multiple geographies, revenues fell seven per cent year on year. Operating profit declined 13 per cent year on year, primarily on US sales pressure, and net profit plunged 19 per cent.

Resolution of US issues remains the largest trigger.