Q1 miss for Dr Reddy's, but analysts remain hopeful for future prospects

Despite missing Q1 expectations, Dr Reddy's continues to see growth in key markets like Europe and India, while managing costs to offset challenges in the US

In the April-June quarter (Q1) of FY26, Dr Reddy’s (DRL) US sales fell 4 per cent quarter-on-quarter (QoQ) to $400 million due to erosion in gRevlimid earnings caused by pricing pressure. On a positive note, DRL posted double-digit growth in most ex-US markets, but overall revenue disappointed. The absence of meaningful abbreviated new drug application (ANDA) approvals for DRL, as well as impending tariffs (since it has no US-based formulations facility), remain concerns. 

DRL’s Q1 FY26 revenue grew 11 per cent year-on-year (YoY) to Rs 8,570 crore, and Europe sales jumped 1.4x YoY to Rs 1,270 crore (15 per cent of sales). Excluding Nicotine Replacement Therapy (NRT) revenues via acquisition, Europe sales grew 13 per cent YoY. India sales grew 11 per cent YoY to Rs 1,470 crore (17 per cent of sales). Emerging markets sales grew 23 per cent YoY to Rs 910 crore (11 per cent of sales). US sales decreased by 11 per cent YoY to Rs 3,400 crore ($397 million; 40 per cent of sales). 

Gross margin contracted 350 basis points YoY to 57 per cent, due to lower margins in PSAI (Pharma Services and Active Ingredients) (down 1,200 bps YoY) and Global Generics (down 375 bps YoY). The EBITDA margin contracted 260 bps YoY to 25 per cent, as lower gross margin was offset by lower expenses (R&D down 76 bps YoY as a percentage of sales). EBITDA was at Rs 2,170 crore, while PAT grew 2 per cent YoY to Rs 1,420 crore. DRL generated free cash flow (FCF) of Rs 430 crore in Q1 FY26. The out-licensing income from Aurigene of Rs 120 crore boosted EBITDA. 

An analyst assessment indicates that the gRevlimid generic contributed 60 per cent of DRL’s FY25 EPS, and the erosion of earnings from this will leave a significant void. Apart from guiding for the curtailment of SG&A expenses, DRL also lowered its FY26 R&D guidance to 7-7.5 per cent of sales. Adjusted for the out-licensing income, DRL’s EBITDA margin was 24.3 per cent. In addition, DRL remains optimistic about growth in the EU, led by new launches across small molecules and biosimilars, aided by the NRT portfolio. 

 

US sales at $398 million were a meaningful miss, with both gRevlimid sales ($135 million estimated) and base business sales (particularly gSuboxone, the largest contributor ex-gRevlimid) being lower than projections due to pricing pressure. Europe sales were flat QoQ, despite strong growth in the NRT portfolio, with ex-NRT business declining 11 per cent QoQ. Emerging markets sales were also flat QoQ. India growth was at 11 per cent YoY as expected.

 

The management says the quantum of gRevlimid sales in Q2 will be similar to Q1, but it may ease down subsequently. Approval for Semaglutide in Canada is expected by Oct-Nov’25, with manufacturing by a partner in FY26 and FY27. Capacity at Vizag will come on stream in FY28. The Phase 3 trial readout for Abatacept is expected in Nov-25, with a launch expected in Dec-26 or Jan-27. The PSAI gross margin of 13 per cent was hit by seasonal weakness, but double-digit sales growth is expected for the full year. The company may optimise 500-600 bps of discretionary costs (non-core, non-revenue-linked). The PLI-linked income was negligible and not expected to be material in FY26. About $100 million in sales from the CDMO (Contract Development & Manufacturing) business is expected in FY26 ($18 million in Q1).

 

North America sales declined for the first time in 16 quarters in Q1 FY26, due to volatility in sales of certain products and sharp competition in g-Revlimid. Europe growth is being driven by the NRT portfolio. The higher competitive intensity in g-Revlimid may result in earnings downgrades until such time as that may be offset. Analysts expect this to impact the full-year FY26 earnings, and possibly even FY27. The stock was up following the results.