Companies

Dr Reddy’s Labs: Quarter marked by strong launches, pricing erosion, weak margins and investigations

Sai Prabhakar Yadavalli | Updated on July 27, 2021

2.5 lakh doses of Sputnik V administered in India so far

Dr. Reddy’s results weighed heavily on its stock, which closed 10.3 per cent lower on Tuesday, as the first quarter performance was impacted by price erosion in the US, lower margins, as well as a subpoena from the US SEC in a corruption investigation. The North American region reported sales of US$235 million – a 2 per cent YoY growth, even as the company launched close to 6 products in Q1FY22, including lucrative ones such as the Ertapenem Injection and gVascepa. Sales in this region have been range-bound over the last few quarters for the company. In the US market - Biocon, Alembic Pharma and now Dr. Reddy’s have reported price erosion in select products owing to increased competition post-Covid. The industry was severely impacted by price erosion only 2-3 years back and had normalised thereafter. Worries on this front seem to have pulled down other pharma stocks, too, on Tuesday.

Overall sales growth of 11 per cent in Q1FY22 can be attributed to a good performance in India and in emerging markets, driven by the branded business in Russia and CIS. The India segment reported revenue growth of 70 per cent YoY on a weaker base with the full period impact of the Wockhardt acquisition and Covid sales during the second wave in the quarter. However, this may not provide a favourable base going forward. Sputnik V was launched in India and 2.5 lakh doses have been administered so far, which suggests a slow start. This, though, is expected to ramp up later, with increased imports and local manufacturing to reach the goal of 250 million doses in one year. Approval for the Sputnik V light version will depend on data from Russia, initially, and further studies as required by DCGI. The stocking in the first half of FY21 impacted the PSAI segment (APIs), which reported de-growth of 12 per cent YoY.

 

Margin overhang

Dr. Reddy’s reported a 300 bps sequential decline in EBITDA margins to 20.7 per cent. Margins were impacted in the quarter on account of price erosion in the US, higher investments in nutraceutical brands in India and digitisation efforts. The aspirational 25 per cent EBITDA margins of the company would require normalisation in PSAI business, a ramp-up in limited competition products in the US and efficiencies from further brand and digitisation investments in India.

 

Based on an anonymous complaint about improper payments in Ukraine and other countries in violation of US anti-corruption laws, Dr. Reddy’s is investigating and addressing a subpoena from the US SEC in this regard. This, along with lower margins, will be a significant overhang on the stock price, even with prospects of vaccine revenues and a strong US pipeline behind it.

Published on July 27, 2021

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