Dr Reddy's: Betapharm blues

Last year may have been tough, but the drug firm should be able to shake off its problems and move on

Betapharm continues to be a bit of headache for Dr Reddy’s Laboratories, which has been forced to write off a notional Rs 1,400 crore on account of its German subsidiary. A sum of Rs 316 crore has been written off towards intangible assets and another Rs 1,086 crore for goodwill. That left the Hyderabad-based drug major reeling with a loss of Rs 520-crore last year, though adjusted for these losses, net profits were up a robust 89 per cent to Rs 850 crore.

Revenues grew a handsome 39 per cent y-o-y to Rs 6,940 crore, driven by sales of the generic version of Glaxo’s anti-migraine drug, Imitrex (sumatriptan), which was launched in the US in November 2008. Even excluding this, sales grew a reasonably strong 24 per cent.

The US market, which fetches the firm about a fifth of its revenues, has been a good hunting ground for it with sales at Rs 1,980 crore on the back of 25 per cent jump in volumes. The bigger surprise, though, were the Russian and CIS markets, which did well despite cross-currency pressures. These markets may bring in just about 12 per cent of the firm’s revenues but they contribute around a fifth of the profits. The home market didn’t fare as well — sales were up a lacklustre 5 per cent.

Also, had it not been for Imitrex, profitability wouldn’t have been as strong.Gross margins of 50 per cent for Dr Reddy’s core businesses were somewhat disappointing. And that was despite a weakening rupee. The management believes it can grow revenues by 10 per cent in the current year driven mainly by sumatriptan and the antacid drug omeprazole.

Also Betapharm is likely to start supplying drugs to insurer AoK in Germany next month. However, analysts say net profits could stay flat or even fall slightly. At Rs 590, the stock trades at just around 13.5 times 2009-10 estimated earnings.