Portfolio

Shares of Dr. Reddy’s Laboratories plummet on weak quarterly numbers

Dhuraivel Gunasekaran BL Research Bureau | Updated on January 11, 2018

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The stock of Dr Reddy’s Laboratories dropped as much as 6 per cent in trade on Friday on poor quarterly numbers (Q1FY18).

Pharma major Dr Reddy’s Lab has reported a 56.6 per cent drop in consolidated net profit to Rs 66.6 crore in the June quarter, year-on-year following pricing erosion in the US and destocking due to goods and services tax (GST) implementation in the domestic market.

The consolidated total revenue was up 2.7 per cent to ₹3,333 crore during the quarter.

Business from the global generic segment, which accounts for 83 per cent of the company’s revenue, saw an improvement during the quarter on the back of new launches. The management has guided for more geographical diversification going ahead and restructuring the R&D cost to realign to the new pricing paradigm.



Weak US performance

The revenue from North America fell by 4 per cent in the first quarter to Rs 1,495 crore as compared to the same quarter in the previous year, due to double digit erosion in prices in the US market due to customer consolidation, increased competition and slow realisation from new launches. The company’s North America business accounts for 45 per cent of the overall revenue.

The recent launches of generics - Vytorin, Angiomax, and Doxil - and expectations of early approval for generic Suboxone and Nuvaring should buttress revenue growth for the company from the third quarter.

However, the remediation measures with respect to the key facilities – Srikakulam, Duvvada and Miryalaguda -- which have been under the US regulatory scanner for a few years, is important for the company as it continues to weigh on the overall performance. Management has said responses to queries for the Form 483 observation on the Bachupally plant (which accounts for more than half of the US top line drugs) have been submitted to the US FDA, while approval of the Duvvada facility would need a re-inspection. The recent audit conducted by the USFDA on Unit II Formulations plant in Srikakulum was completed with zero observations.

As on June 2017, cumulatively, the company has 99 generic filings pending (97 ANDAs, 2 NDAs), of which 59 are Para IV opportunities and 26 FTFs.

Traction in Europe and EM sales

Revenues from emerging markets have been improving over the last few quarters following appreciation in the Russian ruble and better base business.

The revenue from Russia for the first quarter grew by 48 per cent year-on-year to Rs 350 crore. The European business too reported strong growth (up 28 per cent) on the back of new launches.

The revenue from India declined by 10 per cent YoY at Rs 469 crore during first quarter, was mainly hit by channel destocking ahead of GST implementation. With the higher margin business, the domestic business is expected to see improvement in the subsequent quarters.

Lower margins

The operating profit margin for the quarter stood at 10 per cent, declining from 12.3 per cent seen in the same quarter last year due to higher employee cost. Operating profits were down 16 per cent year-on-year.

At the current price (Rs 2475), the stock trades at 36 times its trailing 12-month earnings — around 45 per cent premium to other large cap peers such as Lupin, Sun Pharma and Aurobindo Pharma.

Published on July 28, 2017

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