Dr Reddy’s Q4: It’s a wait and watch, share price spike notwithstanding
The US market continues to hold the key to an upward shift in Dr Reddy’s performance in FY19, which can lead to an upgrade in the pharma firm’s valuations
What explains the 6.3% spike in Dr Reddy’s Laboratories Ltd’s shares on Tuesday? The BSE Healthcare index rose 1.1% as many of its constituents gained. Some gained by as much as 2%. Even then, Dr Reddy’s shares outperformed. The reasons are not clear.
Dr Reddy’s Q4 FY18 results did not contain anything that can explain the spike and the management commentary on issues such as big product launches or even updates on the regulatory compliance front did not bring any pleasant surprises. Maybe the markets were expecting worse numbers. Dr Reddy’s shares had fallen by 6% till Monday, over a week ago.
The US market continues to be a problem, with North America sales down by 10% sequentially, due to price erosion, competition in key products and lower sales of a key drug. The firm launched three products during the quarter.
Some key generic products in the pipeline could get launched later than expected, depending on regulatory clearances. In FY19, however, Dr Reddy’s did say it expects to launch about 15 products, of which some should be limited competition products (which earn better margins). That does raise the prospect of a boost to revenue in FY19.
On its plants that are under the regulatory scanner, the company said it will be able to request an inspection for its Duvvada plant in June, and in Srikakulam, it will report to the US Food and Drug Administration in the near future on activities completed, and await further communication.
In India, revenues rose by 16% over a year ago after adjusting for the goods and services tax-related accounting impact. In Europe, it suffered due to supply disruptions and price erosion, while its emerging market revenues also fell due to a temporary disruption in sales in Russia.
The net effect was that total revenue fell by 1.6% over a year ago, Ebitda (earnings before interest, tax, depreciation and amortization) fell by 4.6% and profit before tax fell by 6.7%. Profit after tax fell by 19% but mainly due to a charge related to changes in the US tax laws.
In FY19, its India business can be expected to do well, barring any new policy-related hiccups. After a 6% decline in revenues, could the US market bounce back is a question nobody has an answer to. If price erosion in the US market stabilizes at lower levels, then it could. That’s also assuming Dr Reddy’s pipeline delivers the promised launches in FY19, especially those with limited competition.
The US market continues to hold the key to an upward shift in Dr Reddy’s performance in FY19, which can lead to an upgrade in the company’s valuations. Positive developments on the US regulatory compliance front could also make a difference, but it’s unwise to speculate on that.