A sharp drop in the firm’s stock ended an impressive rally of about 100% from its 2020 lows
The news of an ongoing probe in the US has led to fresh concerns about the company
Shares of Dr Reddy’s Laboratories Ltd fell more than 10% on Tuesday, thanks to a subpoena from the US SEC (Securities and Exchange Commission) and slightly weaker-than-expected June-quarter results. Besides, the company’s post-results commentary reaffirmed concerns raised by Alembic Pharmaceuticals about pricing pressures in the US markets. The sharp drop in the stock brought about an abrupt end to the impressive rally of about 100% in the company’s shares from its March 2020 lows.
The Street’s concerns about the firm got significantly elevated as it disclosed an ongoing investigation by a US law firm, based on an anonymous complaint. The complaint alleges healthcare professionals in Ukraine and some other CIS countries were being given improper payments by or on behalf of the company in violation of US anti-corruption laws. The company has received a subpoena from the SEC to produce documents pertaining to certain CIS geographies. Since the matter may result in government action against the company, the nervousness of the Street is understandable. The firm’s American Depository Receipts are listed on the New York Stock Exchange.
Meanwhile, the firm’s performance for the quarter ending June came slightly lower on the operating front. Revenue grew 11% year-on-year (y-o-y) and 4% sequentially. This was driven by strong domestic sales growth. Domestic sales, which contribute more than a fifth to overall sales, grew 26% sequentially. The covid treatment portfolio, as anticipated, helped the growth. Analysts expect the firm to benefit from the ramp-up in Sputnik vaccine sales and the acquired Wockhardt portfolio contributions, keeping forward prospects firm. US sales, however, saw an almost flat 1% y-o-y growth, disappointing the Street. Analysts were expecting double-digit growth in the US. The US remains a key geography contributing more than a third to overall sales.
The company said the US growth was led by volume traction in some products and new launches, although this was offset by pricing pressure. Shares of Alembic Pharma, which also spoke of pricing pressure in the US, also fell sharply on Tuesday.
Prospects for the US business, however, remain strong because of new product launches. The company already has launched a large product generic Vascepa that could provide impetus to growth. Dr Reddy’s could generate $70-100 million in sales on a 12-month basis with good margins as per estimates of Morgan Stanley India.
Besides, there is a large generic product launch pipeline, including generics of Revlimid, Kuvan, etc. The firm’s annual report in FY21 had earlier indicated that price erosion intensity has lowered to 6% versus 13-14% y-o-y.
Cumulatively, 93 generic filings are pending for approval with the US Food and Drug Administration. Of these, 47 are for Para IVs and the firm believes 24 of them have ‘First to File’ status, where the company can get six-month launch exclusivity, and hence enjoy better pricing. Among other markets, Europe, which contributes 15% to overall sales, also marked a 12% y-o-y growth. Emerging markets clocked a 14% y-o-y growth.
The firm’s reported earnings before interest, tax, depreciation and amortization (Ebitda) at ₹1,018.8 crore came lower than ₹1,123.9 crore in Q4. Analysts at Motilal Oswal Financial Services Ltd had pegged Ebitda at ₹1,064 crore. Analysts feel that positive levers to drive growth in the US outweigh concerns and hence remain positive on the company. Of course, this needs to be visible in growth in the US going forward.