The 64 per cent jump in net profit of pharma major Dr Reddy’s Labs was driven by healthy sales of high margin drugs in the US, and scaling down of its low-margin tender business in Europe. Thanks to the favourable revenue mix, its operating margins vaulted to 28.4 per cent in the December quarter from 21.1 per cent last year. This is despite adjusting for the impairment write back of nearly ₹50 crore and a 47 per cent increase in R&D costs.

Dr Reddy’s now derives 46 per cent of its consolidated revenues from the US market, compared to 32 per cent a year ago. Strong pick-up in sales of low competition, high margin drugs such as azacitidine and decitabine lifted the company’s revenues. However, given its growing dependence on this market, entry of new players in these products may risk Dr Reddy’s growth.

The company’s decision to downsize its tender business in the European market aided margins. Though this may impact revenue growth in the near term, it will improve Dr Reddy’s profitability.

Formulation sales in the domestic market grew at a sedate 5.2 per cent due to the price cuts under the new drug price policy. However, this may be mitigated by planned launches of niche drugs that are outside the price control regime.

A weak seasonal demand due to late onset of winter impacted growth in the Russian market. Yet, Dr Reddy’s managed to grow revenues by 6 per cent in the geography, even as the industry growth remained flat.

The company has stepped up its investment in R&D particularly in the niche biologics and innovative drugs space. Also, the management has planned capital expenditure of ₹1,000 crore in 2014-15 towards augmenting manufacturing capabilities. These initiatives should pay dividends for the company in the medium term. But its near term fortunes will depend on the ability to fight competition and sustain growth in the US market.

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