Hyderabad: Strong sales in the US helped Dr Reddy’s Laboratories Ltd swing to a profit in the fiscal’s third quarter from a loss in the year-ago period, but its earnings still fell short of expectations because of weak European revenue growth and higher expenses including litigation costs.
The Hyderabad-based company earned a net profit of Rs273.2 crore in the three months ended 31 December, compared with a loss of Rs521.7 crore a year earlier primarily because of an impairment charge at its German unit Betapharm Arznemittel GmbH.
The profit came on a 10% increase in revenue to Rs1,900 crore, Dr Reddy’s said on Tuesday. Net profit would have grown 19% year-on-year adjusting for the one-time impairment charge and associated tax impact in the previous year, it said.
Dr Reddy’s shares declined 3.5% to Rs1,578.85 at the close of trading on the Bombay Stock Exchange, compared with a 1% drop in the benchmark Sensex index to 18,969.45 points. The company had been expected to post a net profit of Rs291 crore, based on the average of 19 analyst estimates compiled by Bloomberg.
Weak sales in Europe, where revenue declined 18% in the quarter from a year ago to Rs140 crore, and selling, general and administrative expenses that rose 17% crimped the company’s earnings. The expenses included higher spending to promote over-the-counter products sold in Russia and a one-time litigation cost in the US, company officials said at a news conference in Hyderabad.
Revenue from Germany, where Dr Reddy’s acquired Betapharm in 2006 for €480 million, was Rs140 crore, or $31 million, in the third quarter—a decline of 33% in rupee terms and 24% in euro terms from a year earlier. Dr Reddy’s has been struggling in the German market since Germany adopted a bidding system for drug purchases that involves intense price negotiations.
“Germany was on expected lines because of the price erosion caused by tenders,” said Dr Reddy’s managing director and chief operating officer Satish Reddy.
“A significant price erosion in the German market, a low growth in domestic market coupled with a decline in the pharma service and active ingredient business caused the lacklustre performance this quarter,” said sector analyst Ranjit Kapadia, who is senior vice-president (institutional research) at HDFC Securities Ltd.
Dr Reddy’s vice-chairman and chief executive officer G.V. Prasad said the pricing pressure in Germany would persist and the company had to cope with it. “The (German) market won’t turn around,” he said. “Maybe our operations will turn around.”
Expectations that a turnaround would be visible as early as in the last quarter have been belied, and neither Reddy nor Prasad was willing to hazard a guess as to when it would eventually happen.
The weak performance in Europe and higher expenses offset strong growth in North America, where revenue increased to Rs480 crore, or $106 million, in the quarter—a rise of 60% in rupee terms and 66% in dollar terms from a year earlier. New product launches in the last one year and market share expansion by older generics led the increase.“The growth in the US drove our topline,” said Prasad.
Kapadia of HDFC Securities said Dr Reddy’s would rely on a one-time opportunity in the US, where it is soon expected to launch a product with six-month exclusivity, to sustain growth.
“It was the three new products launched in the US market since August that actually helped DRL (Dr Reddy’s Laboratories) to post the revenue growth in the October-December quarter,” said Surajit Pal, pharma analyst at Elara Capital Ltd.
Sales in Russia rose 7% to Rs240 crore, but declined 11% in other former Soviet republics to Rs43.4 crore.
In the domestic market, sales grew 14% to Rs300 crore in a quarter during which Dr Reddy’s launched 16 new products. The company will maintain its focus in India on broadening its product range and entering rural markets, said Prasad.
Dr Reddy’s said it had reached settlement agreements with AstraZeneca Plc relating to its filings in the US for approval to sell generic versions of the UK-based drug maker’s Nexium medicine and asthma treatment Accolate. India’s Ranbaxy Laboratories Ltd already holds exclusive 180 days marketing rights for selling its generic version of Nexium in the US.
AstraZeneca has granted Dr Reddy’s a licence to launch the generic version of Nexium capsules on 27 May 2014. The settlement over Accolate ends all litigation over the medicine, whose generic version was launched by the Indian drug maker in November 2010.
C.H. Unnikrishnan in Mumbai and Radhieka Pandeya in New Delhi contributed to this story