Dr. Reddy’s Sees Profit Drop As Pricing Pressure Hits Generics Industry

MUMBAI - India's second largest drug maker Dr. Reddy's Laboratories posted a 26 percent drop in quarterly profit partly due to pricing pressures in the generics business.

Although the Hyderabad-based company saw its revenue rise by 25 percent to 15 billion rupees ($350 million) after a decline in four consecutive quarters, its consolidated net profit fell to 1.35 billion rupees ($31.6 million) from 1.83 billion a year earlier.

The dip in profit was in line with analysts' estimates. In a July 8 note, Indian brokerage house ICICI Securities said Dr. Reddy's operating profit margin was expected to contract due to high base effect, higher R&D cost and worsening margins of betapharm because of price cuts and supply shortages.

Dr. Reddy's said that revenues from its global generics business increased by 25 percent to 10.3 billion rupees ($241 million) driven by key markets of North America, Russia and Germany. The revenue growth was the highest in the North American market at 62 percent due to a combination of volume growth in key existing products, new product launches in the last 12 months and acquisition of the Shreveport facility.

"We are off to a good start for the year," Dr. Reddy's CEO G. V. Prasad told a July 21 earnings call. The company launched 26 new generic products globally during the quarter.

Perlecan Pharma Acquisition

The company also said it would acquire the remaining 85 percent in drug research firm Perlecan Pharma - a company that Dr Reddy's set up along with private equity firms ICICI Ventures and Citigroup Venture Capital in 2005 - for $18 million. Reports surfaced in June that Perlecan Pharma was losing its financial support. Perlecan was supposed to bring molecules to market, but has suffered three failures, leading to the investor bailout (PharmAsia News, June 2, 2008).

Perlecan has $9.5 million in cash and accumulated losses that could provide a tax shield, according to Citigroup analyst Prashant Nair.

The transaction is likely to be completed in a couple of weeks. The decision was taken at the company's board meeting held on July 21. Prasad said that one of the molecules in the Perlecan portfolio is in Phase I trials and that the company plans to license it out.

Dr. Reddy's revenues from Europe increased marginally to 2.9 billion rupees ($67 million) in the first quarter of FY09 compared to 2.6 billion rupees ($60 million) in the first quarter of FY08. The company said that revenues from its German acquisition, betapharm Arzneimittel GmbH, increased by 20 percent to 2.5 billion rupees ($59 million) due to "significant improvement in the supply situation resulting in higher market share." The company acknowledged that it has had some supply chain challenges in the German market but expects these to be sorted out in a quarter or two (Also see "Dr Reddy’s Earnings Plunge On German Unit Charge, Increased Generic Competition" - Scrip, 26 Jan, 2008.).

In a July 22 note, Citigroup's Nair also pointed to rupee depreciation as a likely source for the robust growth, but pointed to a "confusing trend in margins" that could be "worrisome."

The company is, however, optimistic that it will end the year on a positive note. Prasad said that the revenue guidance for the full year remains unchanged with an expectation of overall profit margin reaching 50 percent-plus and improved profitability. The company was looking forward to several new generic launches during the course of the year including the authorized generic of the migraine drug sumatriptan (GlaxoSmithKline's Imitrex) during the third quarter (Also see "Dr Reddy’s Sees Revenue Growth Of 25 Percent This Financial Year, Improved Profitability" - Scrip, 20 May, 2008.).

The company's shares gained 1.7 percent to close at 675.65 rupees on Monday, July 21, on the Bombay Stock Exchange. The stock has gained 13.5 percent during the June quarter while the healthcare index rose 8 percent during the same period. On the New York Stock Exchange, the stock was last traded at $15.18, down 4.53 percent.

- Jeetha D'Silva ([email protected])