Dr Reddy's: Some disappointment in Q4, but generics focus improves outlook

Lower traction in US sales, sequential decline in other key geographies and subdued margin gains disappointed the Street

Dr Reddy’s Laboratories (DRL) posted 14 per cent year-on-year (YoY) growth in revenue at Rs 4,016.6 crore and a 44 per cent jump in net profit to Rs 434.3 crore in the March quarter (Q4).

The numbers were ahead of Bloomberg consensus estimates of Rs 3,895 crore and Rs 418 crore, respectively.

However, there were disappointments, too, including below-par US sales in light of contribution from some special products, a sequential decline in sales across other key geographies, and on the gross margins front. 

The overall numbers also included revenue of Rs 180 crore from derma propriety products, which were sold during Q4. Thus, shares of Dr Reddy’s (DRL) fell 2 per cent on Friday, even as the Sensex rose 1.44 per cent.

North America sales (37 per cent of overall) grew only 3 per cent YoY and 1 per cent sequentially. With contribution continuing from the opioid treatment drug Subaxone generics — relaunched at the end of the December quarter (Q3) — and five other product launches, the Street was expecting better traction.

DRL’s gross margins at 52.4 per cent were also lower than 53.5 per cent in the year-ago quarter, and 53.9 per cent in Q3.

Among other geographies, domestic sales (16 per cent of revenue), too, grew only 6 per cent YoY, and were down 4 per cent sequentially. 

Though Q4 remains a seasonally weak quarter for domestic sales, some analysts were expecting growth of as much as 13 per cent YoY. 

Another significant contributor, the emerging markets (17 per cent of revenues), registered 27 per cent growth in sales on a YoY basis, though sequentially it posted a decline of 9 per cent. It was the Pharmaceutical Services and Active Ingredients (PSAI) segment, which compensated with 18 per cent sequential growth.

Analysts said that there were disappointments; product traction was not in line with expectations but should improve, moving forward. 

Amey Chalke at HDFC Securities remains positive on DRL’s prospects on future US drug launches and expects the company to report better performance in June quarter.

Analysts’ confidence also stems from DRL changing its focus to complex generics in the US — which are more profitable given limited competition (lower pricing pressure) — as well as due to cost control and sale of some of its proprietary products. 

The company is also awaiting regulatory clearance for its Srikakulam-based active ingredients facility, having resolved other regulatory issues.  Hence, the launch of injectables, too, is expected to happen soon. 

Analysts say that they will be watchful of key launches in the US, including those of contraceptive Nuvaring generics (expected by June) and Oncology drug Copaxone generics (by the second half of FY20).  

Any delay in these is likely to impact forward earnings estimates.