Non-regulated markets, leverage to pep up growth of Dr Reddy's Lab

Had it not been for an extraordinary write-off, drug maker Dr Reddy’s Laboratories’ (DRL) December quarter results would have beaten market expectations. At Rs 860 crore, the one-time write-off of goodwill of the company’s German subsidiary, Betapharm, has severely impacted its consolidated earnings.

According to global financial reporting standards, the company has reported a consolidated loss of Rs 521.7 crore against a profit of Rs 244.5 crore during the same quarter last year. However, excluding the one-time loss, DRL’s operational performance has been way above market expectations.

Net profit adjusted for impairment was Rs 230.7 crore, beating Street estimates, which expected it to be at Rs 159 crore. Profit margins also showed a marked improvement. DRL enjoyed an exclusivity period for its generic Sumatriptan during the December quarter last year leading to a high base year effect this December quarter. At Rs 1,730 crore, net revenues were down by 6% against market estimates of a 10% drop. The Street cheered the results, pushing the stock up by nearly 2% which closed at Rs 1,201.5.

DRL has fared better than the local industry. Its growth rate of 20% in the past eight months is above the industry rate of 16%. While its performance in the emerging markets of India and Russia has been the key growth driver, North America and Europe proved to be disappointing. The voluntary product recalls carried out by the company in the US market resulted in a flat growth in revenues. Going forward, its generic drug Omeprazole is likely to help ramp up its market share in the US.

DRL’s operational leverage and cost management has helped maintain its selling and other general expenses (excluding the amortisation expenses) at the same level as last year’s. Strategic changes made in senior management, mitigation of profit erosion in the German market, maintaining healthy product line in the US, increased focus on non-regulated branded markets and good operational leverage are likely to help the company achieve its target revenues of $3 billion by FY013.