US price erosion weighs on Dr Reddy's; Q4 net down 3% to Rs 3 billion

There are not many growth triggers for the company, say analysts

Dr Reddy’s Laboratories reported a 3 per cent decline in net profit at Rs 3.02 billion on the back of a marginal decline in revenues for the March quarter (Q4).

The company attributed its subdued financial performance to continued price erosion in the US market besides a decline in sales revenues across other major markets except for India where it registered a 7 per cent revenue growth in Q4. 

The decline in European sales (5 per cent of overall) and emerging markets (16 per cent of overall) pulled down the performance as the numbers came below expectations. Revenues at Rs 35.35 billion came about 4.7 per cent lower than consensus estimates. Earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 5.77 billion was significantly lower than consensus estimates of Rs 7.16 billion. Net profit at Rs 3.02 billion, too, was about 14 per cent lower than consensus estimates of Rs 3.53 billion.

However, the company has improved its gross profit margin by 2.3 per cent to 53.5 per cent during this quarter owing to a decrease in costs, including R&D expenses. 

“We concluded a challenging year for Dr Reddy's with a relatively muted fourth quarter performance. This was mainly on account of continuing headwinds in the US markets and a temporary drop in sales in Russia, attributable to a shift in the channel purchasing pattern. Looking ahead, we will continue to work diligently on resolving pending regulatory issues. We will also focus on accelerating new products to market and improving our approval process,” Dr Reddy’s Co-chairman and Chief Executive Officer G V Prasad said.

The solace in the quarterly performance, however, comes from a single-digit (6 per cent) decline in US sales impacted by pricing pressure and regulatory issues. The gross profit margins improved as the company controlled costs. 

The India market (about 17 per cent of overall sales) grew 7 per cent and is doing well and, adjusted for excise and tax changes, the growth would be much more and is satisfactory, say analysts. The stock, however, rebounded in trade to end 6.3 per cent higher at Rs 2,013.75.

Moving forward, the triggers for US growth are, however, missing, feel analysts. The company launched three new products in Q4 and has 110 pending approvals, with 63 para IV products, of which 30 have first-to-file status. First-to-file products are ones that on approval can be launched with six months’ exclusivity. The key for the approvals and launches gaining momentum is regulatory clearance.

Responding to a question on the outlook for the coming quarters, Prasad said it would pretty much depend on the product approvals as the company has a good pipeline, which could make a difference in the current year.

But otherwise he expects the company’s performance to continue at this level. Leaving the flatfish revenue growth, caused by price erosion and fewer launches, Prasad feels the company has done well on the cost front during the current year. The cost optimisation has been one of the significant efforts aimed at coping with the current generics market scenario, he said.

Notably, the pressure on US base business is likely to continue. Recent USFDA approval of Cadila’s hypertension treatment drug Toprol XL generics and Sagent’s approval for Dacogen generics (oncology) and the competition in FY19 (Toprol XL: Aurobindo, Cipla; Dacogen by Sun Pharma) adds to concerns on Dr Reddy’s US base business. Both products currently are among Dr Reddy’s top 5 products, jointly contributing sales of $100-120 million (11-13 per cent of FY18 US generics sales) according JM Financial estimates.

Incremental price erosion on key base business products, the timelines of regulatory clearance of key facilities, and the commercial realisations from key US pipeline assets are key reasons for analysts remaining cautious. Ranvir Singh at Systematix Shares said after the results that though numbers were weaker but not bad, he would maintain a cautious stance for the next few quarters.

On the regulatory overhang, Prasad sounded optimistic and said the company was nearing the end of remediation and would go back to the regulator in a couple of quarters with regard to its oncology formulations unit at Duvvada in Visakhapatnam and an API facility at Andhra Pradesh’s Srikakulam. The facilities remain under USFDA’s warning letters since November 2015, while the third facility at Miryalaguda (Telangana), an API unit, was cleared after re-inspection in June 2017.

Chief Operating Officer Erez Israeli, who had joined the company in April, maintained that achieving cost competitiveness in products, besides the new launches that attract less competition, would be key to sustain in the generics business.