Some bright spots in Dr Reddy’s Q3 results, all eyes on US FDA inspection
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Dr Reddy’s Laboratories Ltd had a better-than-expected showing in the December quarter but has cautioned that growth in the March quarter may be slower.
That is unlikely to bother investors as much as the fate of its three facilities that are under review, due to non-compliance with US Food and Drug Administration (FDA) norms. They will be inspected in February and March.
A green signal will be good news for Dr Reddy’s as it can hope to get more products into the market, as products filed from these three affected facilities are held up.
But that is not assured and different observations may be filed, as seen in another case.
In the December quarter, consolidated sales, under the new Ind-AS accounting standards, declined by 6.6% over a year ago but rose by 3.5% sequentially.
Sequential growth was driven by a higher growth of 21% in Europe and 23% in emerging markets, while that in North America was slower at 3%.
In the US generic market, the company said that it continued to face pressure on sales due to competition and pricing issues. The North American generic business, which contributed 45% to sales, is expected to be under pressure in the March quarter due to a lack of significant launches.
The company said the review process of its applications for complex generic products was moving slower than expected. The launch of a key oncology drug is expected to be delayed, as a partner site where it was transferred to (due to the problems at the company’s own site) has also run into compliance trouble.
While cautious about the March quarter, Dr Reddy’s management expects FY18 to see better growth in the US, and expects to launch 15 drugs.
More launches is what helped along growth in Europe, while a more stable currency situation in emerging markets (EMs) has supported growth.
Higher sales of biosimilar products in EMs also added to growth. Its India business was hit by demonetization and the effect of price controls.
While sales growth was higher, gross margin fell to 59.1% from 59.5% a year ago, but sequentially improved from 56%.
While better sales growth is one reason for this improvement, the firm reined in its selling and general administration costs, which was visible in the preceding quarter, too. It also attributed some benefit to beneficial currency movements.
That’s why its Ebitda margin rose to 23.2% from 18.2% in the preceding quarter, although it was still down, compared with the 24.5% a year ago. While its operating profit rose by 31.1% sequentially, almost flat depreciation led to its net profit increasing by 45.2%, sequentially.
That is a good performance from Dr Reddy’s but its cautious outlook for the fourth quarter and the fate of the coming inspections will occupy investor attention. The company trades at 41 times its annualized FY17 earnings and its share is almost flat from a year ago. That is an expensive valuation but also reflects hope it will get back on its feet. Any major setback on the US FDA inspection report will be a blow to that hope.