Dr Reddy’s Laboratories posts decent Q2 results as US sales stabilize

Dr. Reddy’s Laboratories Ltd (DRL) announced a decent set of numbers for the second quarter of fiscal year 2024, reflecting continued growth momentum for the Indian pharma major and improved numbers from the US.

DRL reported total revenues of Rs 68,802 million in Q2 FY24, a growth of 9% over the same quarter last year. Revenues were up 2% compared to the preceding quarter. Net profit after tax stood at Rs 14,800 million, an increase of 33% year-on-year and 6% quarter-on-quarter.

According to DRL’s management, the company delivered strong results driven by market share gains and growth momentum in its US generics business. The robust performance in the US and Europe offset headwinds like price erosion in some markets.

DRL derives a major share of its revenues from international markets, especially North America. The US is the largest generics market globally, though competition is intense there. In Q2 FY24, North America revenues were Rs 31.7 billion, up 13% over last year. However, there was a sequential decline of 1% compared to Q1 FY24 due to pricing pressures.

The US business benefited from the growing contribution of new product launches, integration of acquired assets like Mayne Pharma, and favorable currency movements. These partly offset the impact of price erosion in the US market. DRL launched 4 new products in the US in Q2 FY24, adding to its portfolio of generic medicines.

The company is focused on complex and differentiated products to overcome commoditization and pricing pressures in the US generics space. DRL filed 2 new Abbreviated New Drug Applications (ANDAs) in the quarter, taking its cumulative filings pending approval by US FDA to 79 (including 75 ANDAs and 4 NDAs). Of these, 41 are Para IV filings with potential for exclusivity periods. DRL believes 20 filings have ‘First to File’ status.

Revenues from Europe grew 26% year-on-year to Rs 5.3 billion in Q2 FY24. New product launches, portfolio expansion and favorable forex drove growth, which mitigated the impact of price erosion.

The India business grew 3% y-o-y to Rs 11.9 billion, aided by new product introductions. However, national list of essential medicines (NLEM) related price controls and muted demand due to weak season for acute therapies affected growth. Excluding NLEM impact, India sales rose in mid-single digits.

Emerging markets revenues were Rs 12.2 billion, with 1% decline y-o-y but 5% growth over preceding quarter. Sales in Russia were affected by currency devaluation, declining 3% y-o-y in rupee terms. In constant currency, Russia sales rose 4% y-o-y and 9% q-o-q. The CIS markets and Romania grew 1% y-o-y and 12% sequentially. Rest of World markets rose 1% y-o-y and 6% q-o-q.

Revenues from the Pharmaceutical Services and Active Ingredients (PSAI) segment, which provides contract manufacturing solutions, totaled Rs 7 billion. This reflected 9% y-o-y and 5% q-o-q growth, supported by new product launches and forex gains.

On the profitability front, DRL’s gross margin dipped slightly by 40 basis points y-o-y to 58.7% in Q2 FY24. However, it was flat compared to the preceding quarter. Gross margins for the Global Generics and PSAI segments were 63.6% and 17.8% respectively.

According to the company, marginal price erosion in some products and change in business mix affected overall gross margin. However favorable forex movements helped negate some of the impact.

DRL’s EBITDA rose to Rs 21.8 billion, with EBITDA margin at 31.7%. Net profit margin was 21.5%, which was significantly higher than 17% in Q2 FY23. The expansion in margins was aided by higher operating leverage, forex gains, and lower effective tax rate of 22.7% vs 30.9% last year due to adoption of the new corporate tax regime.

The company reported robust free cash flow generation of Rs 14.5 billion during the quarter. It had a net cash surplus of Rs 59.1 billion as on September 30, 2022, which provides financial strength for growth initiatives.

DRL invested Rs 3.2 billion in capital expenditure during the quarter as it invests for expanding capacities and capabilities. It also continued to invest strongly in R&D with spend of Rs 5.4 billion or 7.9% of revenues.

The company is advancing its productivity, innovation and digital transformation agenda to build resilience and drive sustainable growth. As per MD GV Prasad, DRL is continuing to strengthen its pipeline both organically and inorganically to aid growth.

DRL’s first half FY24 results have been encouraging, with 15% revenue growth and double-digit EBITDA margin. For the full fiscal year, DRL expects revenues to grow in low double-digits. Profitability may remain under pressure in the near term before optimization benefits start reflecting next fiscal year.

The Q2 performance provides positive signals about DRL’s success in navigating industry challenges and maintaining growth momentum. However, it needs to keep working on expanding its product portfolio, controlling costs and enhancing productivity to defend margins.

DRL’s efforts to grow in emerging pharmerging markets and expand portfolio of differentiated products will help counter pricing pressures in the US market. Its focus on improving quality and compliance is also critical for long term sustainable growth.

Overall, DRL seems to be progressing well on its strategic priorities like strengthening R&D pipeline, operational optimization and digitization. Its execution in coming quarters will be key to maintaining the growth trajectory and overcoming sectoral challenges of pricing erosion and regulatory disruptions.