Dr Reddy’s spent 55 per cent more on research and development in the latest June quarter compared to a year ago. But its profit margins were still healthy at 19.9 per cent with new launches such as montelukast granules, finasteride 1 mg and zoledronic acid launched in the last 12 months in the US market.
Strong growth in US generics segment helped Dr Reddy’s Laboratories’ post healthy sales growth in the June quarter. This made up for the sharp decline in Europe and sedate growth in the active ingredients business.
The company’s formulation sales in India remained flat during the quarter due to high inventories with dealers and a dealer strike in Maharashtra. With the cessation of strike by early July, growth may normalise in the current quarter. In order to protect margins, the company has consciously scaled down its low-margin tender businesses in Germany and the UK. This led to a 28 per cent slide in Dr Reddy’s’ Europe sales this quarter.
Outlook
The company is focussed on building a niche product pipeline of complex products and biologics in the US. This explains the sharp jump in R&D spend as a proportion of sales from 6.2 per cent in June 2012 quarter to 8.5 per cent during the same quarter this year. Given the ongoing R&D programmes in niche generics and biologics, research spend is expected to remain at current levels. With a healthy pipeline of 64 products pending approval in the US, Dr Reddy’s is set for good growth in the US market.
Further, market share gains in recent launches such as finasteride and reclast may help the company sustain growth momentum. While the new drug policy will trim selling prices for some drugs sold in domestic markets, the revenue impact on account of this is expected to be less than Rs 60 crore, four per cent of Dr Reddy’s India sales.