Dr Reddy's reported operating margins look muted (decline of 340 basis points year-on-year) due to the impairment charge taken in the quarter under review. Excluding this, operating profit margins have improved by 60 basis points to 24.9 per cent.

The sharp reduction in the reference prices in the German market and signing up of new tenders at lower rates, led to writing down of brand values to the tune of Rs 100 crore.

Dr Reddy's revenue growth of 32 per cent for the quarter was facilitated by strong performance in the US generics (32 per cent), Russia (19 per cent) and pharmaceutical services and active ingredients segment (21 per cent).

The low base effect in the India formulations did not help in the last quarter and the segment posted a dreary 11 per cent growth (in rupee terms) lagging the market. Europe was yet another laggard with a decline of 16 per cent largely due to severe pricing pressure in the German market.

US growth was led by older OTC products such as omeprazole Mg, lansoprazole as well as tacrolimus and new launches like ziprasidone, fondaparinux, in addition to products from Shreveport facility. Lower-than-expected offtake of olanzapine by Teva due to tardy generic substitution led to inventory write down, which, coupled with withdrawal of DEPB benefits, unfavourable business mix, dragged Dr Reddy's gross margin down by 170 basis points (bps) to 52.6 per cent.

Reported net profit for the quarter showed a paltry two per cent growth, on the back of 520 bps increase in tax rate (19.6 per cent). The company has filed 17 ANDA's (Abbreviated new drug application) during the year and 80 filings cumulatively are pending approval, of which 41 are Para IV's and seven are first-to-file (FTF's).

Though the company has commenced filing for bio-similars in the emerging markets, filings in the key regulated markets is likely to be back-ended, pending clarity on the regulatory pathways and delays in roping in a development/marketing partner.

While the management is confident of meeting their FY13 guidance of $2.7 billion (Rs 14,000 crore) and return on capital employed of 25 per cent, with a slew of launches lined up for the next 12 months, the real challenge lies in sustaining growth beyond FY13.

(This article was published on May 12, 2012)
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