Dr. Reddy’s Q1 profit plunges 80% to Rs126.3 crore on US, Venezuela woes

Dr. Reddy’s misses analysts’ estimates with net sales falling 14% to Rs3,234.5 crore in the first quarter

As of 30 June, Dr. Reddy’s has 78 generic filings pending for approval with the US Food and Drug Administration. 
Photo: Mint
As of 30 June, Dr. Reddy’s has 78 generic filings pending for approval with the US Food and Drug Administration. Photo: Mint

Hyderabad: India’s second-largest drug maker Dr. Reddy’s Laboratories Ltd on Tuesday said June quarter net profit fell 80% due to weak sales in North America and loss of business in Venezuela.

Net profit fell to Rs.126.3 crore in the quarter ended 30 June, from Rs.625.7 crore in the year-ago period, while net sales fell 14% to Rs.3,234.5 crore. The company missed analyst expectations on both parameters.

About 20 analysts polled by Bloomberg had, on average, expected the company to post net earnings of Rs.489.80 crore on net sales of Rs.3,837.2 crore.

“We have come through a very difficult first quarter, with our top and bottom lines impacted by a decline in volume growth, particularly in the US market and the loss of business in Venezuela,” said G.V. Prasad, co-chairman and chief executive of Dr. Reddy’s.

Venezuela, which was the company’s fourth-largest country by sales at $136 million in fiscal year 2015, has turned out to be a nightmare due to restrictions imposed by the Latin American country on transferring money out of the country after it ran short of foreign exchange due to a slump in crude oil prices and a worsening economy.

The company didn’t book any revenues from Venezuela in the first quarter.

Other challenges in the quarter included price erosion and delayed launches following a warning letter (for alleged violations of manufacturing standards) from US drug regulators, which “significantly impacted our earnings,” Prasad pointed out.

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As of 30 June, the company has 78 generic filings pending for approval with the US Food and Drug Administration.

On Tuesday, Prasad sought to reassure investors that the Hyderabad-based pharmaceutical company was doing the right things to sort out the issues tied to manufacturing standards of its plants in Telangana and Andhra Pradesh.

“We continue to take actions that focus on remediation, strengthening our quality systems and executing on our strong product pipeline,” he said in a statement.

The company said it is in the process of sending a request for re-inspection in next few days.

Dr. Reddy’s said it spent about $35-40 million on remediation work that includes legal and professional charges.

The company on 5 November received a warning letter from the USFDA for alleged violations in manufacturing standards for its active pharmaceutical ingredient plants at Srikakulam in Andhra Pradesh and Miryalaguda in Telangana, and an oncology formulations facility in Visakhapatnam (Andhra Pradesh).

Sales of generic drugs in North America, which accounts for more than half of its total generic sales, fell 16% from a year ago to Rs.1,552.3 crore, due to cut-throat competition (particular for antiviral medication valganciclovir or valcyte and anti-cancer drug azacitidine or vidaza) and pricing pressures.

The erosion was steep in US—for Valcyte that contributed about $120 million on an annualized basis, it has dropped to $40 million, the company said.

Sales in India rose 10% to Rs.520 crore from a year ago, well below the company’s expectations, hurt by pricing notifications of the National Pharmaceutical Pricing Authority (NPPA) and the wholesale price index (WPI) based annual price decline.

Revenues from emerging markets declined 26% to Rs.430 crore, largely on account of Venezuela where the company sales plummeted to zero.

Dr. Reddy’s has indicated a tough second quarter—as price and volume erosion of some its key products is expected to continue in the absence of any significant new generic approvals.

The company said it is losing a key contract supply account of McNeil Consumer Healthcare from its Shreveport facility, Louisiana, which is set to have an impact of $25 million on net profits of the company in coming quarters.

The company said the dry spell of generic launches in the US has come to an end in the current quarter with the approval of omeprazole and sodium bicarbonate capsules last week by USFDA.

“The recovery is expected from second half, as new launches kick in,” said Saumen Chakraborty, chief financial officer of Dr. Reddy’s.

“We factored in the loss of Venezuela business, but we are surprised at the steep erosion of US business, which is concerning,” said Siddhant Khandekar, assistant vice-president of research, ICICI Direct.

“The company is losing ground in the US with lack of new launches and erosion of its base business,” said an analyst who tracks pharma at a Mumbai-based brokerage house who didn’t want to be named citing his company’s policy.

“The successful resolution of (US) FDA warning letter and new approvals - will hold the key for Dr.Reddy’s going forward in the US market – and this would take at least two-three quarters to play out,” the analyst above said.

On Tuesday, shares of Dr. Reddy’s fell 4.37% to close at Rs.3,322.85 on BSE, while the benchmark Sensex declined 0.42% to close at 27,976.52 points.

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