Dr Reddy’s Laboratories serves a bitter medicine in March quarter


Top pharmaceutical firms have bad news for investors who are looking for a recovery in business. After Lupin Ltd, Dr Reddy’s Laboratories Ltd has reported subdued performance for the March quarter.

Reported revenues of Dr Reddy’s increased 14% from a year ago. But exclude the ?180.7 crore the company received for the sale of its US rights for three dermatology brands, and revenue growth drops to an unexciting 8.5%. On a sequential basis, revenues are flat.

Even otherwise, the sectoral performance is telling. US revenue grew a mere 1% sequentially, despite some big product launches. The disappointment does not end there. Revenue in India dropped 4% sequentially. On a year-on-year basis, India revenue is up just 6%, trailing industry growth and Street estimates by a sizeable margin. Together, both these geographies generate more than half of Dr Reddy’s revenue, and have dragged down overall growth numbers.

The lacklustre performance in the US implies limited boost from the new drugs, which the Street was banking upon. This also made the company susceptible to pricing and cost pressures. Gross margin narrowed 100 basis points from a year ago to 52.4%. In Q1 FY19, margins were as high as 55.7%. If one were to exclude the proceeds from the sale of dermatology brands, the drop in margin will be significantly higher.

Not surprisingly, the performance disappointed the Street, which sent the stock down 2.5% on Friday. To recap, investors drove Dr Reddy’s shares up 38% in the past year, as the company moved to reduce costs, realign business priorities and brought it back to the growth path. But the progress in the March quarter suggests the recovery is a bit patchy.

The management expects gross margins to improve in FY20, helped by cost-rationalization measures and higher growth in key markets. It is confident of sustaining growth momentum in India and other emerging markets. India revenue grew 12% in FY19, despite the setback in the March quarter. Revenue from emerging markets, which includes Russia, jumped 28%. The company is benefiting from expansion into new geographies and from the expansion of its product portfolio in these countries.

While Dr Reddy’s post-results commentary sounds encouraging, what’s crucial for investors is an improvement in the US market. Its big-ticket products, such as Suboxone, are facing increasing competition in the US. This can limit the incremental revenue addition in FY20, warn analysts.

Likewise, two crucial products, Nuvaring and Copaxone, which the company is working on, offers significant growth opportunities in FY20. But much depends on the eventual volumes of these products. Indian drug firms’ progress on new product sales has been patchy of late. This, coupled with the subdued performance in March, may cause some caution among Dr Reddy’s investors.

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