Pricing trend, launches, stability of growth boosters for Dr Reddy's

Near-term outlook and valuation are expected to support the stock price

Dr Reddy's, India's third-largest listed pharmaceutical company by market capitalisation, posted a steady performance for the December quarter. Barring Europe, which saw a decline, most key markets posted YoY growth in the quarter, leading to 8 per cent growth in consolidated revenues. 

Among the top performers were the emerging markets, which reported a 20 per cent jump; the proprietary business gained 37 per cent. Within emerging markets, the rest of the world segment saw sharp 46 per cent growth aided by product launches and higher sales volumes for the base business. The emerging markets business of Dr Reddy’s is the second-largest contributor to revenues, accounting for 21 per cent of overall sales.

Though the US is the biggest market, emerging markets and India are the key focus areas for the company, which is looking to maintain high growth rates aided by market expansion, higher sales productivity, fresh launches, and over-the-counter products.

In the Indian market, like its peer Cipla, growth — which came in at 7 per cent YoY — was impacted by the falling volumes of Covid-related products. Price hikes on certain products and new launches helped it offset the decline in the Covid portfolio. Adjusted for the Covid portfolio, sales in the geography was robust, according to the management. The company is looking at registering Sputnik as a booster, introducing a two-dose vaccine (Sputnik-M) for adolescents and also tapping the export markets.

The company outperformed the overall pharma market in the quarter with growth of 23.8 per cent against IPM (Indian pharmaceutical market) growth of 18 per cent. Gastrointestinal, respiratory and cardiovascular therapies that account for over 40 per cent of its domestic sales contributed to the outperformance in December. The Street believes strong growth will continue. Karan Vora of HDFC Securities says: “While the company may witness Covid-led tailwinds in India in Q4, it is well poised to grow its non-Covid portfolio in double digits.” 

Given the sharp price erosion witnessed by some peers, such as Torrent Pharma, the progress for Dr Reddy’s in the US market is being keenly watched. The US is by far the biggest contributor to the company’ sales, accounting for 38 per cent of sales. While price erosion in the US was in double digits, the company put up a good show with growth of 7 per cent, led by a better product mix, fresh launches, and market share gains in existing products. The price erosion is expected to ease in the coming quarters, says the management.

Its US drug pipeline comprises over 88 products, including niche/complex formulations where there can be exclusivity-related opportunities. Analysts at ICICI Securities believe that in the near term what may drive growth are generic versions of Copaxone (multiple sclerosis) and contraceptive Nuvaring. The launch of the cancer drug Revlimid in Q2FY23 is another trigger.

Analysts at Motilal Oswal Research have cut their earnings per share estimates (FY22/FY23/FY24) by 3.5-5.5 per cent. Pricing headwinds across markets, barring India, slower offtake in the pharmaceutical services and active ingredients segment, and moderate outlook for the Sputnik vaccine led to the cut in estimates. 

The brokerage, however, has a ‘buy’ rating on the stock, given the limited competition product pipeline in the US, outperformance in the Indian market, cost-optimisation, and attractive valuations. The stock, which is down over 8 per cent over the past year, has underperformed the Nifty Pharma index, which registered gains of 7 per cent. Also at just under 20x its FY23 earnings estimates, the stock is among the cheapest in the large-cap pharma space. However, on the fundamental side, investors should await trends on US pricing, fresh launches, and stability of growth across markets before considering the stock.