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Home / Markets / Mark To Market /  Dr. Reddy’s growth strategy will require smooth execution

Dr. Reddy’s Laboratories Ltd aims to enter areas such as disease management, nutraceuticals, biologics and cell and gene therapy as part of its Horizon 2 strategy, it said at its investor day on Tuesday. This is encouraging, but would also mean a rise in research and development expenses, which as a percentage of revenue are expected to inch up to 10-11% from roughly 8% seen in FY22. Note that the investments in Horizon 2 assets are likely to contribute meaningfully to revenue only by 2027.

Dr. Reddy’s Horizon 2 strategy is intended to support company’s long-term sustainable growth, while the Horizon 1 strategy is key from a near-to-medium term view as it focuses on growing its core segments, which include generics, biosimilars, active pharmaceutical ingredients, branded generics, and over-the-counter products.

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However, analysts are not particularly thrilled from a near-term perspective. For one, growth in the US business, excluding gRevlimid, is a cause of concern. In FY23, the company plans to launch 20-25 products in the US market.

“The road ahead may not be smooth for Dr. Reddy’s as it enters a period of accelerated investments on top of pricing pressures and cost escalation. While 25 annual launches in the US may help offset persistent price erosion in the US, growing on a high base remains a challenge," said analysts at Edelweiss Securities in a report on 21 June. “While the management is confident of growing the India business, we await evidence of investments fructifying," they said. India revenues have risen at a CAGR of 17% over FY19-22 to nearly 4,200 crore.

The emerging market business grew at a CAGR of about 16% in FY19-22 and there are plans to scale up this business. In China, the company is eyeing revenue growth of 2-3 times in the next five years. The Europe business, which constituted 8% of FY22 revenue, is expected to contribute more gradually on the back of expansion in newer countries.

At the investor day, Dr. Reddy’s reiterated its guidance of 25% Ebitda margin and 25% return on capital employed in the medium term. It aspires to achieve double-digit sales growth in the same period.

Analysts at Motilal Oswal Financial Services expect Dr. Reddy’s to deliver 15% earnings CAGR over FY22-24 led by 17%, 17% and 13% sales CAGR in North America, Europe and PSAI segment, respectively. PSAI refers to pharmaceutical services and active ingredients.

Execution of the growth plans will remain a key monitorable to the stock, which has declined by nearly 20% in the past one year.

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