Healthy growth in the US and key emerging markets coupled with the rupee depreciation helped Dr. Reddy’s post an impressive 78 per cent jump in profits in the second quarter ended September 2013. The company’s operating margins improved by 2.4 percentage points to 28.3 per cent in spite of a 71 per cent jump in research spends.

Gains from the rupee depreciation made a significant contribution to the profit jump and may not sustain in the near future.

The company made four new launches in the US, in segments with limited competition — azacitidine, decitabine, donepezil 23 mg and divalproex ER. A shift in the company’s strategy to focus on high-margin, niche products with fewer rivals is evident from its rising research spend. R&D expense as a percentage of sales has risen over the past four quarters from 6.1 per cent last September to 9 per cent now. This may help Dr. Reddy’s sustain the growth momentum in the US. Even as its local rivals struggled with single-digit growth in the Indian market, Dr. Reddy’s managed to grow its sales in the home turf by 9 per cent. The company’s pragmatic shift towards non-prescription drugs in the Russian and CIS markets is paying off, too. While the Russian market grew only 10 per cent this quarter, Dr. Reddy’s sales expanded 44 per cent.

The proportion of non-prescription drug sales has gone up from 32 per cent last year to almost 35 per cent now. This may insulate Dr. Reddy’s from the slowdown in this market.

Though revenues and margins for the pharmaceutical services and active ingredients segment slipped compared to a year ago, it has shown significant improvement on a sequential basis. The growth pace is likely to improve in the second half of the fiscal following a favourable change in product mix.

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