Dr Reddy’s Laboratories QoQ showing catches a cold on weak US sales

Dr. Ready’s Laboratories (DRL’s) stock fell 6.9 percent Thursday in weak results from the January-March 2022-23 (FY23) period (Q4 or Q4). The Hyderabad-headquartered company achieved an operational failure in the fourth quarter of FY23 due to lower sales across markets, excluding Europe, as well as higher marketing and research and development costs.

The company’s revenue grew by 16 per cent YoY and decreased by 7 per cent QoQ at Rs.6,296 crore. The company said the decline in revenue on a quarterly basis was primarily due to declines in North America and emerging markets, which were partially offset by growth in Europe and India.

In the fourth quarter of FY23, the company’s revenue in North America grew by 27 percent year-on-year and decreased by 17 percent quarter-on-quarter to Rs.2,530 crore. The year-on-year performance was on account of product launches and positive foreign exchange (Forex) movement which was partially offset by price erosion. The company said the sequential decline was due to fluctuations in demand for launches.

However, Elara Capital said the sequential decline was due to a lower share of cancer drug Revlimid in the US.

“We estimate revenue from Revlimid’s public issuance in the fourth quarter of fiscal ’23 to be $50 million versus $130 million each for the July-September and October-December quarters,” the brokerage said.

EBITDA margins grew by 1,605 basis points year-over-year to 24.3%. However, adjusted for non-core brand sales, margins were at 21 percent.

Profit after tax increased by 192.6 per cent year-on-year to Rs.952.5 crore. US business grew 26.8 per cent year-on-year to Rs.2,532 crore, driven by product launches and favorable forex traffic, which was partially offset by price erosion.

While the growth rate in the US was ahead of estimates, the growth rate in India was on the same line. European revenues were also higher than estimates. Pharmaceutical services (Pharma) and active ingredients saw growth due to positive currency movements, but were below estimates. In its note, ICICI Securities said that despite the quarterly fluctuations, the company continues to operate within its defined framework.

The brokerage remains positive about the company’s growth story, based on simultaneous launches across key geographies and the ongoing recalibration of the existing portfolio.

However, a few other brokerages are bearish or neutral regarding the prospects for drug companies.

“Reported DRL sales are in line with our estimates, falling 5 percent behind our Ebitda estimates due to higher sales, general and administrative expenses (15 percent increase year-over-year) and research and development costs (24 percent increase year-over-year),” noted analysts. At Kotak Securities.

The brokerage added that the failure would have been 21 per cent higher had the company not reported an income of Rs 264 crore from divestment of a few brands in India to Eris Lifesciences.

It has a ‘Downgrade’ rating, with a price target (TP) of Rs 4,700 per share.

The company has maintained Ebitda’s margin guidance of 25 percent over the medium term, but the company’s quarterly core margins have fluctuated widely between 17 percent and 23 percent in two years. It also maintained its return on capital employed at 25 percent.

“Aside from peptides, we are building major launches, including generic versions of Pentasa, Copaxone, and Venofer, as well as increasing factor sales in generic versions of Amitiza, NuvaRing, Remodulin, and Lexiscan in our estimates. However, the US base is elevated. Given the slow pace of complex launches, we remain concerned about the company’s growth outlook in the United States, excluding the generic version of Revlimid,” the analysts said.

Analysts at Prabhudas Lilladher Research downgraded the stock to “Rate” from “Buy” with a revised TP of Rs 4,500 per share (from previous Rs 4,900).

At the current market price, DRL is trading at 24 times Revlimid’s adjusted 2024-25 price-to-earnings estimate.

“Any new, abridged approvals for expensive drug orders and a sharp recovery in core business margins are key risks to our call,” the brokerage said.

According to Bloomberg data, of the 26 analysts who have come up with their ratings since Wednesday, 14 have “neutral”/”comment” or “reduce”/”see”/”underweight” on the stock. The other 12 have a Buy/Outperform/Add rating. Of those 26, at least eight have downgraded the stock.

The average one-year take profit for these 26 brokerage firms is Rs 4,935.