Higher research spend impacts Dr Reddy's profit

The 12 per cent year-on-year fall in Dr Reddy’s Labs’ operating profit during the March quarter was due to two factors.

First, a 71 per cent jump in R&D cost dented profit. R&D expenses as a proportion of revenue peaked at 11.4 per cent as the company is investing in developing a differentiated product pipeline.

Next, the company’s flat performance in the high-margin Russia and CIS market added to the pressure.

Subdued winter conditions in this region, coupled with geopolitical tensions in Ukraine, contributed to a slack performance in this geography.

A shift in focus towards developing differentiated generic products for the US, in addition to proprietary and biosimilar products, led to the sharp jump in Dr Reddy’s research spend.

Though this may benefit the company in the long run, a high outgo on this front may put pressure on the company’s profit in the coming quarters, too.

Performance in the Russian and CIS markets may be contingent on overall economic recovery, currency movement and resolution of the conflict in Ukraine.

Given the healthy margins in this geography, growth revival here will be critical for Dr Reddy’s profitability.

The company’s US sales were strong in 2013-14, thanks to the nine products launched in the year.

But lack of large product opportunities in the current year may temper the growth pace.

Also, the benefit from the rupee weakness, which helped revenue and profit growth over the last few quarters, may be at risk, should the rupee stay at current levels or

strengthen further.