News Analysis

Generics business drives Dr Reddy’s Labs Q2 performance

Maulik Madhu BL Research Bureau | Updated on October 29, 2020

Acquired business of Wockhardt and North America market contribute to the growth

Pharmaceuticals major Dr Reddy’s Laboratories reported consolidated net profit of ₹762 crore for the September 2020 quarter, down 30 per cent from a year ago. The overall consolidated revenue rose 2 per cent to ₹4,897 crore compared to the same quarter last year.

Also read: Dr Reddy’s Laboratories Q2 net down 30% at ₹762 crore

An increase in cost of goods sold, which includes raw material and employee cost, and relatively higher tax expense in the latest September quarter compared to the year-ago period, impacted profitability. Tax expense for the September 2019 quarter included the benefit of deferred tax assets.

Following the government’s cut in the minimum alternate tax rate last September, the company recognised ₹499 crore as deferred tax assets, thereby lowering its tax expense.

Generics business delivers

Segment-wise, revenues of the company’s Global Generics division and the Pharmaceuticals Services and Active Ingredients division grew 21 per cent and 20 per cent year-on-year to ₹3,984 crore and ₹851 crore, respectively. The two divisions account for 77 per cent and 18 per cent, respectively, of the company’s consolidated revenue as of 2019-20. However, the decline in revenue for the Proprietary Products segment impacted the overall performance.

Also read: Spotlight on Indian pharma’s resilience during pandemic times

New product launches, higher sales volumes and the full impact of the integration of the generics business acquired from Wockhardt in June this year, helped the Global Generics business deliver. Broadly, the Wockhardt business would have contributed to around a fifth of the revenue increase in the latest quarter versus last year. Dr Reddy’s Labs sells over 400 generic drugs across many geographies – the US, Europe, Emerging Markets and India.

Additional revenue from new product sales and a favourable forex rate worked in favour of the Pharmaceuticals Services and Active Ingredients division. This segment is involved, among other things, in manufacturing active pharmaceutical ingredients (APIs).

The contraction in revenue from the Proprietary Products & Others division in the September 2020 quarter to ₹62 crore (down 92 per cent year-on-year) was largely reflective of a higher base in the same quarter last year. The September 2019 quarter revenue from this segment included a licence fee received by the company from selling certain territory rights for two of its neurology franchise products.

Geography-wise performance

The larger markets of North America and India, which account for 68 per cent (based on 2019-20 figures) of the company’s Global Generics business revenue, reported an impressive year-on-year revenue growth of 28 per cent and 21 per cent, respectively, in the September 2020 quarter. However, impacted by the fall in revenue from the Russian market, the Emerging Markets revenue grew only 4 per cent. The emerging markets (includes Russia and other CIS countries) account for a third of the company’s global generics revenue.

Revenue growth in the Indian market was driven mainly by the inclusion of the acquired segments of Wockhardt’s business for the entire September 2020 quarter. Sales of two new Covid-19 products such as Avigan (Favipiravir) and Remdesivir in India too contributed to the growth.

Impact on profitability

On the cost front, an 11 per cent increase in the cost of goods sold resulted in a 12 per cent decline in operating profit to ₹1,267 crore in the latest September quarter compared to the year-ago period. The profit impact was despite the significantly lower impairment charge of ₹78 crore relating to products with reduced market potential in the quarter ended September 2020. The company had booked an impairment charge of ₹355 crore during the same quarter last year.

The year-on-year increase in research and development expenditure (as a percentage of revenue) from 7.6 per cent to 8.9 per cent in the September 2020 quarter, though, is a positive. This goes in line with Dr Reddy’s Labs focus on launching new products across markets which should contribute to its global generics revenue. The company launched nine new drugs during the September 2020 quarter. Furthermore, the company’s API manufacturing facilities put it in a strong position in the face of any import-related disruptions.

Thanks to its positioning as a defensive bet in times of uncertainty, the stock of Dr Reddy’s Labs has gained nearly 89 per cent since the one-year low recorded in March 2020 low. It now trades at a trailing 12-month price-to-earnings ratio of 51 times.

Published on October 29, 2020

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