Dr. Reddy’s Misses Street Estimates On U.S. Headwinds, Margins Fall
Dr. Reddy’s operating margins dropped 690 basis points in Q4 on a year-on-year basis.
Dr. Reddy’s Laboratories Ltd.'s profit and sales missed street estimates, as regulatory overhangs and pricing uncertainty took a toll on the drug maker’s topline.
Net profit jumped nearly 1.8 times to Rs 337.6 crore compared to Rs 122.6 crore in the same quarter a year ago, according to an exchange filing. The bottomline was expected to come in at Rs 419 crore, as per the Bloomberg consensus estimates. the company had accounted for a Rs 385 crore write-off in its Venezuelan subsidiary in the same period last year, which makes the profit jump look significant.
Revenue, on the other hand, fell 5.3 percent to Rs 3,499 crore, missing estimates of Rs 3,683 crore. The decline was on account of a fall in revenue of the generic business, especially in North America. The generic drug business saw a 19 percent fall in revenue from the U.S. due to increased competition in key products coupled with the discontinuation of a supply contract with McNeil Consumer Healthcare. Income from the customised pharmaceutical services fell 28 percent.
Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 22.6 percent to Rs 590.5 while EBITDA margins contracted by 690 basis points. It has announced a final dividend of Rs 20 for the financial year 2016-17.
Headwinds
The company is facing substantial headwinds from the U.S. Food and Drug Administration and pricing uncertainties in the U.S., its largest market. The American drug regulator has tightened its vigil on the company and its peers, increasing inspections over the last few months.
The latest notice issued by the U.S. pharma watchdog was on March 28, when it made 11 observations on the company’s Bachupally plant in Hyderabad. Approvals from various regulators have also slowed down for the company.
The stock has also underperformed the S&P BSE Healthcare Index and the NSE Nifty 50 benchmark, so far in 2017.
Not Alone
Investors and analysts are also keeping a look out for how Indian pharmaceutical companies plan to deal with the regulatory hurdles and pricing pressures in the U.S.
Dr. Reddy’s peer -- Glenmark Pharmaceuticals Ltd. did admit in an interview to BloombergQuint, that its base portfolio had eroded by 10-15 percent in the January-March quarter.
After looking at Glenmark’s comments on erosion of their portfolio base, I would look out for the management commentary along the lines of price cuts in the U.S. market.Bhavesh Gandhi, Analyst, IIFL Holdings
The stock was trading 0.2 percent lower at Rs 2,587 after the announcement of the results.