Dr. Reddy’s growth strategy will require smooth execution
PremiumThe emerging market business grew at a CAGR of about 16% in FY19-22 and there are plans to scale up this business
PremiumDr. 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.
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Execution of the growth plans will remain a key monitorable to the stock, which has declined by nearly 20% in the past one year.
