The share price of Dr Reddy’s Laboratories fell about 3 per cent in its early trades on Monday on the back of weak third quarter earnings.
Dr Reddy’s Lab, ranked number 11 among the US generics companies, has reported a 19 per cent drop in December quarter consolidated profit to Rs 470 crore versus Rs 579 crore reported in the same period last year. Its consolidated revenue fell by around 7 per cent to Rs 3,707 crore from Rs. 3,968 crore last year due to weak sales in North America and emerging markets.
The drop in revenue growth can be attributed to regulatory inspections of its three facilities by the USFDA. The company received USFDA warning letters regarding deviations from current good manufacturing practices (cGMP) at its active pharmaceutical ingredients (APIs) plants at Srikakulam and Miryalaguda and for violations at its oncology formulation facility at Duvvada.
This has led to disruption in supplies, delay in approvals and remedial costs. For instance, the launch of Gleevec, a generic version cancer drug, is further delayed due to quality issues at its partner facility, which is also under regulator scrutiny. Gleevec was initially planned to be manufactured at its own facility but was transferred to partner facility due to warning letter by the FDA. The company derives over half of its revenue from North America.
The management has guided for re-inspection to be completed by the USFDA for all three facilities by the end of March. However, it was cautious about the next quarter result which is expected to be moderate.
The revenue from North America fell by 15 per cent in the third quarter to Rs 1,659.5 crore as compared to the same quarter in the previous year, due to pricing pressure and increased competition in some of generics like Valgancyclovir. The company’s North America generics base business grew at 15 per cent CAGR in the last five years.
As of December 2016, cumulatively, 92 generic filings are pending for approval with the USFDA, which include 90 ANDAs and two NDAs.
Dr Reddy’s has a vertically integrated business model with three segments — global generics, pharmaceuticals services and active ingredients, and proprietary products. Around 83 per cent revenue is currently being derived from global generics.
The revenue from India rose by 2.4 per cent YoY at Rs 590 crore, hit by demonetization and the effect of price controls. The business from Europe came in at Rs 210 crore; increase of 11 per cent.
Operating profit was at Rs 879.3 crore. EBITDA margins have improved to 24 per cent in third quarter from 18 per cent that seen in last quarter, which was mainly aided by control on selling expenses and lower R&D spends.
Currently, the share price of Dr Reddy’s Lab recorded a low of ₹3,050 and has come-up from there to the current levels of ₹3,091.85 (down 1.58 per cent) on the BSE.