The stock of Dr Reddy’s Laboratories dropped around 10 per cent in trade on Wednesday on poor quarterly numbers  released by the company on Tuesday, after market hours. The company reported a 76 per cent drop in June quarter consolidated profit at ₹153 crore versus ₹647 crore in the same period last year. Income from operations fell around 14 per cent to ₹3,222 crore from ₹3,752 crore, following continuation of the regulatory overhang.

The stock slumped to a low of ₹2,958.25 in intraday deals on the NSE and closed at ₹2,980.20 against the previous day’s close of ₹3,319.65.

The drop in revenue growth can be attributed to regulatory inspections of its three facilities in November 2014, January and February 2015 by the USFDA. The regulator had identified deviations with current Good Manufacturing Practices (cGPM) following which a warning letter was issued to the company in November 2015. In its response, Dr Reddy’s Labs had submitted a corrective and preventive action plan and a progress report on its remediation in January, March and May 2016.

In the last few years, almost all drug majors — Sun Pharma, Lupin, Cipla, and IPCA Labs — have faced the heat of the USFDA during its inspections. The deviations as identified by the regulator are taking time to resolve, while firms are attempting to get their affected facilities recertified. These delays keep a lid on top-line growth as it delays the launch of new products. Also, products suffer price erosion as other competitors take away market share.

Need for settlement

Dr Reddy’s Labs has a vertically integrated business model with three segments — global generics, pharmaceutical services and active ingredients, and proprietary products. But around 83 per cent revenue is currently being derived from global generics. The company derives over half of its revenue from North America. Thus, for growth to return, these regulatory issues have to be closed out with the regulator.

In the quarter ending June 2016, global generics revenue declined 17 per cent y-o-y to ₹2,646 crore as the company had to grapple with lower sales from North America. But the company continues to launch products in the US. It recently introduced its first set of new drugs, Zembrace and Servio, in the US.

The company has 20 USFDA-inspected API and formulations manufacturing facilities, with the ability to manufacture a variety of dosages – oral solids, injectibles and ointments.

9% rise in expenses

With R&D centres in India, the UK, the Netherlands and the US, the company’s expenses for the quarter ended June 2016 grew at 9 per cent y-o-y to ₹480 core.

During the quarter ended June 2016, the company had bought back equity shares for a total consideration of almost ₹1,570 crore. The company had bought back nearly 51 lakh shares as part of a share buyback offer at an average price of ₹3,090.92 a share. 

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