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Business News/ Opinion / Online-views/  Dr Reddy’s down on German sales
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Dr Reddy’s down on German sales

Dr Reddy’s down on German sales

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Germany is proving to be a nightmare for pharmaceutical companies with a large exposure to that country. After Biocon Ltd, Dr Reddy’s Laboratories Ltd felt the heat from falling price realizations in Germany, and its share price fell by around 3% on Tuesday as its December profit came in below Street expectations.

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The company’s sales rose by just 10% to Rs1,899 crore as sales in Europe declined by 16% and growth in Russia and other members of the Commonwealth of Independent States too was a low 4%.

Dr Reddy’s profitability appears spectacular, with an operating profit of Rs293 crore compared with a loss of Rs595 crore in the year-ago period. But the loss was solely due to non-recurring write-offs of Rs860 crore pertaining to intangibles and goodwill. Excluding these, its operating profit margin would match the December 2010 quarter’s figure of 15%.

The global generics division contributes to about three-fourths of sales, with the rest coming from the pharmaceutical services and active ingredients division. Generics did very well in the US, with sales rising by 60% on to new launches and Indian sales rose by 14%. It has launched Lansoprazole, Zafirlukast and Valacyclovir during this quarter. Dr Reddy’s also announced a settlement with AstraZeneca Plc, which allows it to continue selling Zafirlukast (which was earlier launched at-risk, meaning if it was found to infringe the patent, it would have to pay a penalty) and it can sell Esomeprazole or generic Nexium in 2014. Dr Reddy’s wants to launch a generic version of Allegra-D24 in the US, and if it is successful in this quarter, sales growth will get a boost.

Margins were flat during the quarter also because Dr Reddy’s selling and general expenses rose by 17%, while research and development (R&D) expenditure rose by 46%. This was due to spends on hiring and on marketing certain regions, which are expected to drive growth in future quarters. R&D expenses are expected to remain at these levels, of around 7% of sales, as they bring in newer products to market.

Dr Reddy’s should not have a problem maintaining its sales growth in most large markets, with a number of product launches and marketing activities planned, but the effects of price erosion in Germany will last for a few more quarters. That may cast a shadow on the stock price, till the Europe effect gets fully excised from its valuation.

Graphics by Graphics by Yogesh Kumar/Mint

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Published: 26 Jan 2011, 09:47 PM IST
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