Decent Quarter for Dr. Reddy's - Analyst Blog

Dr. Reddy's Laboratories (RDY) reported third quarter fiscal 2011 earnings per American Depository Share (ADS) of 40 cents compared with a loss per ADS of 70 cents in the year-ago period. Higher revenues helped boost earnings.

Revenues

The company reported quarterly revenues of $424 million, up 10%. Dr. Reddy's reports revenues under two segments – Global Generics and Pharmaceutical Services & Active Ingredients (PSAI). Revenues at the Global Generics segment went up 16% (on INR basis) to $303 million, while PSAI revenues declined 5% (on INR basis) to $111 million, during the third quarter.

Generics revenues (on INR basis) increased 60% in North America, 7% in Russia and 14% in India, while it declined 18% in Europe and 11% in other CIS marktes. The European market recorded the highest decline among all the regions with Germany being the worst hit with a 33% drop (on INR basis), partly mitigated by the rest of Europe experiencing a 39% increase.

Margins

Gross profit margin at Dr. Reddy's during the quarter went up to 55% from 51% in the year-ago period. Revenues from new products propelled higher margins.

Selling, general and administration expenses amounted to $142 million, reflecting an increase of 17% due to elevated sales activities in India and Russia.

Higher research and development (R&D) activities led to a 46% increase in R&D expenses, which came in at $29 million.

Dr. Reddy's expects R&D expenses to be about 7% to 7.5% of sales in future.

Other Details

During the quarter, Dr. Reddy's launched 42 new generic products and filed 6 abbreviated new drug applications (ANDA), bringing the total number of ANDAs pending US Food and Drug Administration (FDA) approval to 74. Of the 74 ANDAs, 32 are Para IV filings and 12 are first-to-file.

The company entered into settlement agreements with AstraZeneca plc (AZN) for Nexium (esomeprazole) and Accolate (zafirlukast), during the reported quarter. Per the terms of the agreement, AstraZeneca granted Dr. Reddy's the license to launch a generic version of its gastroesophageal reflux disease treatment Nexium in the US on May 27, 2014, or earlier in certain circumstances.

As per the agreement for Accolate (asthma treatment), the companies ended all litigation related to the product and AstraZeneca permitted Dr. Reddy's to continue selling the generic of Accolate without risk. Dr. Reddy's had launched the generic drug “at risk” on November 18, 2010.

Our Take

We currently have a Neutral recommendation on Dr. Reddy's. We believe the company is in a strong position to benefit from the huge potential represented by the US generics market, as drugs with sales of about $75 billion are slated to lose patent exclusivity in the coming years.

 
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