Dr Reddy’s: Street still awaits triggers

Resolution of warning letters issued by FDA and clarity on launches key

Dr Reddy’s Laboratories’ December 2017 quarter (Q3) performance has disappointed on several counts and suggests that the wait for investors is not over yet.

Revenues at ~38.06 billion, which grew three per cent year-on-year (y-o-y) and seven per cent sequentially, were ahead of analysts’ estimates of ~36.88 crore. These figures were aided by a licensing income of ~1.3 billion. However, its benefits were mitigated by one-offs at the expenditure and tax levels. The company provided ~319 million towards settlement charges pertaining to litigation, besides a oneoff tax amount of ~930 million on account of reforms in the US tax laws.

Overall, the reported operating profit at ~8.05 billion fell from ~8.79 billion a year ago. Net profit at ~3.03 billion plunged 29 per cent y-o-y and was lower than the expected ~3.38 billion.

Reacting to the results, the stock fell 2.3 per cent to close at ~2,504 on Thursday.

The performance in key geographies was also not up to the mark. Not only did North American generic sales (42 per cent of overall revenue) fell three per cent y-o-y, but domestic sales (16 per cent of revenue) also grew just three per cent. European generic sales (five per cent of revenue), too, fell seven per cent y-o-y. Some respite came from the emerging markets business (Russia, Commonwealth of Independent States, Romania, and the rest of the world; 15.5 per cent of revenue), which grew seven per cent.

The US business remains a major challenge. The company said the decline in sales was on account of higher price erosion due to channel consolidation and increased competition in some key molecules as well as adverse impact of foreign exchange.

The decline could have been more but was cushioned by the contribution from the launch of kidney treatment Ranvela generics, which along with a few more launches, pushed up North American sales by 12 per cent sequentially.

Analysts such as Ranbir Singh at Systematix Shares were anticipating a better performance in the US business, aided by launches. But the performance was lower-thanexpected, indicating a sharp pressure on base business. These suggest that the resolution of warning letters pertaining to its three plants remains crucial. Dr Reddy’s is not witnessing faster approvals for new products in spite of 102 generic filings pending with the US drug regulator. Its plants at Srikakulam (produces ingredients) and Duvvada (oncology formulation) are awaiting clearance, while Miryalaguda (ingredients) has received an establishment inspection report.

Prior to results, analysts at Motilal Oswal Securities had said the stock would remain range-bound till there was lack of visibility on the key US launches.

While analysts were earlier factoring in clearance of plants by end-FY18, they are now expecting the same by mid-FY19. Ranjit Kapadia at Centrum Broking said he would maintain his ‘hold’ rating on the stock, and so did Singh. The firm’s efforts towards proprietary products, biosimilars, etc, though are positive, but will take time to accrue benefits, said analysts.