Dr Reddy’s US generics business drives profit growth
Better profitability resulted in the company's net profit growing by 13.6% over a year ago, against the 5% that some analysts were expecting
Dr Reddy’s Laboratories Ltd did see sales growth slow as expected in the June quarter, but it surprised investors with better-than-expected profit growth. They returned the favour by bumping its share up by 5.2% on Thursday. While the company’s sales grew 7.7%, the mix worked in its favour. The more profitable generics business grew by 7%, while the lower margin PSAI (pharmaceutical services and active ingredients) business grew 1.4%.
Even within the generics business, the more profitable North American generics business grew 14.3%. Though there were no new launches, Dr Reddy’s benefited from good growth in its base business. Europe’s sales benefited from two product launches, while India’s growth continues to be good, rising 19%. But emerging markets were a drag, partly due to macroeconomic conditions and currency-related adverse effects. Here, sales declined by 19.8%.
Operating profit margin rose by a good three percentage points to 26.2% over a year ago. Both material and other operating expenses rose at a much slower rate than sales. Only research and development expenditure grew ahead of sales growth, at 13.2%. But that is a common occurrence across Indian generic firms, as they develop less-common generic drugs for the developed markets, to ensure they have an attractive portfolio in the coming years.
Better profitability resulted in the company’s net profit growing by 13.6% over a year ago, against the 5% that some analysts were expecting. That explains the surge in its share price. But can this continue? The current quarter will be the first full quarter when the UCB portfolio acquisition will contribute to revenues. The June quarter saw 10 days of sales getting added. That should add heft to sales growth for sure.
In the overseas business, some of the launches that contributed to growth were done after the June 2014 quarter. Therefore, a high base effect may make its presence felt. Dr Reddy’s has launched a new product in the US market in July. Its Srikakulam plant is not yet out of the US Food and Drug Administration’s radar. A green signal will be a big confidence booster as will a few more attractive US generic drug approvals. Emerging market countries—such as Venezuela and Russia—may continue to be a drag, as their contribution to revenue at 15% and macroeconomic conditions remain volatile.
After the euphoria over Dr Reddy’s estimate-beating performance dies down, investors will go back to looking at what can sustain its performance. The stock is already up 18.5% since mid-June.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!