Dr Reddy's Labs Q1 Preview: Market share loss in products to drag profits

Indian drugmaker, Dr Reddy’s Laboratories is all set to deliver its financial performance for the first quarter of financial year 2024-25 (Q1FY25) on Saturday, July 27, 2024. 

The pharma giant is expected to witness a subdued April-June quarter with its bottomline to take a hit on a year on year (YoY) basis, while the topline is estimated to grow in mid single digits.  This comes as the company faces increased competition and pricing pressure in key markets as well as products. 

According to brokerage estimates compiled by Business Standard, Dr Reddy’s may see its average revenue rise by 7.2  per cent year-on-year (YoY) to Rs 7,250 crore as against Rs 6,757 in the first quarter of FY24. Sequentially the topline may increase by mere 1.8 per cent compared to Rs 7113 crore in Q4FY24

Moreover, the pharma major may register an average net profit of Rs 1316 crore for the June quarter, against Rs 1,406 crore in Q1FY24. This translates to a decrease of 6.4 per cent YoY for Q1FY25. 

Though on a quarterly basis, profits could slightly improve by 1.8 per cent. The company reported profit after tax of Rs 1,292 crore in the December quarter of FY24. 

The street will look out for updates on potential approval and launches in the US over the next 12-18 months to drive growth, update on status of biosimilars pipeline and effect of licences and partnerships formed in recent years. 

Meanwhile, here’s what top brokerages expect from Dr Reddy’s Labs Q1FY25 results:

Kotak Institutional Equities: Analysts at Kotak are baking in North America sales at $295 million excluding Revlimid sales with 1 per cent QoQ growth largely led by stable market share across most molecules.

Dr Reddy’s is expected to clock in $110 million Revlimid sales in Q1FY25, against $100 million in the preceding quarter. 

Meanwhile, domestic sales are expected to grow by 16 per cent YoY in Q1FY25, led by 9 per cent growth in its organic business, as well as, contributions from the in-licensing deals with Sanofi and Bayer, analysts at Kotak noted. 

Overall, they expect Dr Reddy’s sales to grow by 8 per cent YoY and 3 per cent QoQ in Q1FY25. 

The brokerage is estimating flat gross margin at 70.5 per cent, down 80 bps YoY for Q1. Further, consolidated earnings before interest, tax, depreciation and amortisation (Ebitda) will dip by 3 per cent YoY to Rs 20.1 billion, with Ebitda margin declining by 300 bps YoY to 27.5 per cent. 

InCred Equities: InCred Equities anticipates a 2 per cent decline in US sales, amounting to $386 million, driven by market share losses in products like Ciprodex, Vascepa, Suboxone, and Toprol. However, they expect this to be partially offset by increased sales of Revlimid. 

In India, a 7 per cent YoY growth is expected. Meanwhile, the Russian market is projected to experience a modest decline of 5 per cent year-on-year, typical for the seasonally weak first quarter. In contrast, the rest of the world (RoW) market is likely to maintain momentum with a robust 25 per cent YoY growth. 

InCred Equities forecasts a QoQ margin improvement of 230 basis points due to a weak base, though year-on-year margins are expected to decrease by 260 basis points.

Nuvama Institutional Equities: Those at Nuvama said that Dr Reddy’s earnings are likely to be soft due to competition and pricing challenges in its key products like Ciprodex, Vascepa and gSuboxone. They further expect flat growth in US sales YoY and QoQ to $390 million, whereas a growth of 9 per cent YoY in India business. According to the brokerage, the company may see Ebitda margins in the ~25–26 per cent range in line with the company’s guidance. 

BNP Paribas: The brokerage said that it expects US sales at $395 million with contribution of Revlimid at similar levels of Q4FY24. While domestic formulation may grow by 9 per cent YoY with Ebitda margin improvement of 210 bps QoQ, analysts said. 

According to the brokerage, Key downside risks include potential regulatory hurdles as all facilities are compliant currently;  higher-than-expected price erosion in US generics; lower-than-industry revenue growth in domestic formulation; and competition in the Revlimid space. 

Centrum: Centrum expects US sales to grow by 5 per cent year-on-year (constant currency basis), reaching $410 million, driven by strong demand for niche products such as Revlimid.

Domestic sales are projected to increase by 11 per cent year-on-year to Rs 13 billion, led by significant traction in gastrointestinal, antidiabetes, and pain management segments, offsetting declines in cardiac therapy sales.