Workers pour in raw material to product medicine capsules at Dr Reddy’s plant. (Photographer: Amit Bhargava/Bloomberg News)

Despite Quarterly Blip, Emerging Markets, Russia Businesses To Hold Up: Dr. Reddy’s Labs

Pharma major Dr. Reddy’s Laboratories Ltd.’s net profit for the second quarter of the fiscal year 2017 dropped 60 percent on a year-on-year basis to Rs 309 crore, but doubled compared to the quarter-ended June. However, adjusted for the National Pharmaceutical Pricing Authority’s drug price overcharge related provisions, the net profit was in-line with Bloomberg consensus estimates. According to analysts, resilience in the U.S. business was a positive takeaway for the quarter.

There was a positive surprise in U.S. sales at $242 million (down 14 percent year-on-year) versus estimate of $230 million.
Surya Patra, Analyst, Phillip Capital

The company has seen good response to Zegerid and Nitroglycerin launched this quarter, Abhijit Mukherjee, chief operating officer of Dr. Reddy’s told BloombergQuint in a telephonic conversation.

Pricing pressures have become a part of the business model now, Mukherjee said, and can be offset only through meaningful launches. The company remains ‘cautiously optimistic’ on growth recovery in financial year 2017-18.

Here are edited excerpts of the conversation.

How was the company’s performance in the quarter gone by? Did it meet your internal expectations?

I would say yes. I know we had touched a bit of a bottom with all the headwinds that played out. On a quarter-on-quarter basis we have made moves in right direction and that was expected. All we need to do is to keep the momentum and keep going northwards from here.

Dr. Reddy’s has been seeing incremental pricing pressures for some of the key products. Your comments on how you see the price erosion scenario going ahead.

Pricing pressure has become part of the business model now. Having said that, this quarter was better than the last. But this will vary from quarter to quarter. We have to counter this with meaningful launches. With meaningful launches we would weather all this and still provide good business results. If we do not do that, then not just for us but for everyone the business model for U.S. become questionable.

Are there any updates in terms of the U.S. FDA re-inspection of the company’s three facilities? What are the timelines you are working with?

We have done our bit, we made ourselves a commitment and we have completed that commitment. We have extended that to several other plants, we have written back to the agency, made a request for re-inspection. So it follows a natural timeframe, they slot it in the calendar, it is difficult for me to provide a date on that. At the same time, we are also working with the agency for a face-to-face meeting, so that we can present what we have achieved in the last few quarters.

When can we start seeing contribution from the portfolio of eight ANDAs acquired from Teva?

Some of these are under litigation but if everything goes favorably, we can see the from the next financial year. So far, the progress of assets seems satisfactory; based on the due diligence we had certain assumptions and they are playing out quite well.

How has some of the recent launches done? You had Zegerid and Nitroglycerin launch this quarter. How has the initial response been?

Both these launches seen fairly good response. There are other small launches but these are the two reasonably significant ones.

What does the growth or rather recovery trajectory looks like for financial year 2017-18? How long do you think it will take before we start seeing any improvement in the U.S. business in terms of approvals and new launches?

We remain cautiously optimistic and I think we are moving in the right direction. Let’s see if we can maintain some momentum quarter-on-quarter. Why I am not going to specifics is because so much is dependent on a few assets. Launching a number of plain vanilla assets won’t take us too far, the destiny is in the hand of a few assets – some we have de-risked some we are in the process of de-risking. We have to also make sure that these assets keep getting approvals and we are able to launch them. Please remain optimistic is what I can say at the moment.

Since you are talking about some of the differentiated products, if you could talk about efforts on building that complex generics and biosimilars and when these efforts could meaningfully add to your numbers?

We have spoken in the past in terms of our very very deep efforts on complex generics, but the proof of the pudding is in eating, and hence I would provide more colour to it when we have a few launches. In the past, we have done quite a few which have helped us in building the U.S. business but let’s get a few good milestones to speak about it. As far as biosimilars are concerned I think it is moving in the right direction. The current strategy is to leverage these molecules very deeply in the emerging markets. There is the access versus affordability issue, which creates a huge potential and that’s where biosimilars come in. The depth in those market, in terms of usage, will be much more which is very satisfying for us and that will be over the next few quarters a very exciting journey. I feel really excited to see some of these go into the market. We are already in many markets and again, as we clock in more revenue, gets more patients into the fold, we will talk about it in the coming quarters.

Talking about the emerging markets and the Russia/CIS geographies, we saw some healthy rebound this quarter. Is this a one-off or do you expect this trend to continue?

We expect the trend to continue in a positive direction. The main reason is that oil is holding steady and all predictions suggest that it is unlikely to go down at the moment. What I gather is it is going to hold steady and maybe inch up a little bit which gives us hope that some of the commodity-dependent countries’ currencies will be steady here on. And the usual emerging market story should be back, which is organic growth with a steady currency.

For the domestic market, was it the seasonality factor playing out this quarter or you believe there is strength that you see in your India business despite the regulatory and price control concerns? Could you put a number to the domestic market growth for FY17 and FY18?

This quarter has been fairly good with 14 percent growth, but these businesses cannot be read on specific quarter-on-quarter basis. Overall I think the direction is good. We would look forward to an overall double-digit growth for the year which in the current context we should be fairly satisfied with. The price control is a little bit of a concern but we will have to engage more with the government to see how we can mitigate some of these things, but difficult to comment at this juncture. But overall the organic growth in the business is looking good.

On the margins front, what is the normalised level of margins that we could see given the remediation-related expenses are completed?

We are trying to keep a close control on costs and reducing it in certain areas. The main factor in the improvement of EBITDA as a percentage of turnover would be sales growth and that’s what we have to be very fixated on so that we are able to step up the sales now that the headwinds have played out and that would in turn translate into EBITDA margin.

Could we see more in-licensing deals with multinational companies to market their products in India and what is the kind of revenue that we can expect from such deals?

Yes, it may be of deep priority. Some we speak about are the big ones like Teva. But a whole lot of small in-licensing deals are going on in all geographies. And I am fairly satisfied with our business development team. They are doing not just in-licensing business development deals but some of these are very thoughtful, value-accretive deals and I think it will all add up to an extent. I think I fell fairly excited about it.