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Dr Reddy's facing tough times but set to overcome with investments in R&D for new drugs
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Sanjay Pingle, Mumbai
July 26 , 2016
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Dr Reddy's Laboratories (DRL), the second largest Indian pharma major with consolidated net sales of Rs.15,400
crore plus, has set to overcome challenging circumstances with higher
investment in research and development, focus on operational excellence
and acquisitions. The company implemented structural changes for
ensuring the quality after receiving US FDA warnings during 2015-16. DRL
is a global generics player with 83 per cent of its sales coming from
generics segment.
 DRL
scrip was under pressure after receiving warning letters from US FDA
authorities during November 2015 in respect of inadequate quality
control procedures at three manufacturing plants in India. The scrip,
which touched to its yearly highest level at Rs.4382.95 on October 20, 2015, declined sharply below Rs.3,000 mark in January 7, 2016 and reached at its yearly lowest level at Rs.2,750 on January 21, 2016. Considering the low price, the management declared buy-back offer for Rs.3,500 per share for an aggregate amount of Rs.1,569 crore during February 2016.
Currently, DRL scrip is moving around Rs.3,600 on BSE with market capitalization of around Rs.61,500
crore. At the end of March 2016, DRL promoters were holding 25.6 per
cent equity stake and FIIs were holding 38.7 per cent. Mutual funds,
banks, corporate bodies, insurance companies and others holding worked
out to 11.1 per cent. Individuals were holding only 7.8 per cent and
Custodian for ADRs holding were at 16.8 per cent.
The company
received US FDA warning letter to its API manufacturing facilities of
DRL at Srikakulam, Andhra Pradesh and Miryalaguda, Telangana as well as
oncology formulation manufacturing facility at Duvvada, Visakhapatnam,
Andhra Pradesh on November 5, 2015. Thereafter, share price movements
were impacted and scrip lost investor confidence as the major revenue of
over 50 per cent is coming from US markets.
For the challenging year ended March 2016, DRL's consolidated net sales increased by 4.6 per cent only to Rs.15,380 crore from Rs.14,703
crore in the previous year due to lower sales in Europe, Russia &
other CIS market. Its global generic net sales increased to Rs.12,922 crore from Rs.12,148 crore and that of pharmaceutical services & active ingredients (PSAI) segment declined by 12.9 per cent to Rs.2,737 crore from Rs.3,143 crore. The sales of proprietary products went by 163 per cent to Rs.266 crore from Rs.101 crore.
Its North American sales contributed 53 per cent to its gross sales and reached at Rs.8,199 crore as against Rs.7,074 crore in the previous year, a growth of 15.9 per cent. Its domestic sales moved up by 11.5 per cent to Rs.2,204 crore from Rs.1,977 crore. However, European sales declined by 1.7 per cent to Rs.1,749 crore from Rs.1,780 crore and that in Russia & other CIS countries nosedived by 19.9 per cent to Rs.1,418 crore from Rs.1,771 crore. Similarly, sales in other markets declined by 13.2 per cent to Rs.1,894 crore due to volatile exchange rates, especially in Venezuela and Russia.
DRL's EBIDTA increased by 11.2 per cent to Rs.4,190 crore during 2015-16 from Rs.3,768 crore in the previous year despite lower other operating income as well as other income. Its service income declined to Rs.147 crore from Rs.169 crore and other operating income to Rs.95 crore from Rs.115 crore. However, license fees income moved up to Rs.77 crore from Rs.37 crore.
The interest burden declined by 23.8 per cent to Rs.82 crore from Rs.108 crore, but depreciation provision went up 27.8 per cent to Rs.971 crore from Rs.760 crore. Taxation provision worked out to Rs.524 crore as against Rs.563 crore. DRL provided Rs.462
crore for foreign exchange loss during 2015-16 which put pressure on
bottom line and its net profit declined by 7.9 per cent to Rs.2,151 crore from Rs.2,336 crore. EPS worked out to Rs.126.15 as against Rs.137.18 crore.
As against the equity capital of Rs.85.3 crore, DRL has built up strong reserve & surplus position which stood at Rs.11,616 crore as compared to Rs.9,798 crore in the previous year. The company has reduced its long term borrowing by 25.3 per cent to Rs.1,069 crore from Rs.1,432
crore and its debt equity ratio worked out to 0.26:1 as against 0.39:1
in the previous year. EBDITA margins improved to 27.2 per cent from 25.6
per cent. The company management declared handsome equity dividend of
400 per cent for 2015-16.
DRL has 52 subsidiaries and 3 joint
venture companies. It added two new subsidiaries viz., Dr Reddy's
Laboratories Japan KK, Japan and Reddy Pharma SAS, France. It also
formed a new joint venture company called DRES Energy Pvt Ltd during
2015-16. Its German subsidiary Reddy Specialties GmbH ceased to be a
subsidiary as it is merged with Reddy Holding GmbH.
The company's R&D expenditure increased by 6.2 per cent to Rs.1,790 crore from Rs.1,685
crore and worked out to 11 per cent of total revenues. The company
filed 50 drug master files (DMFs) and its cumulative number of DMF
filings reached at 768. Further, DRL filed 13 ANDAs and 1 NDA with US
FDA. Currently, 82 generic filings are pending for approval. With the
help of R&D investments, it launched 51 new products in global
market including India.
During June 2016, DRL acquired eight
ANDAs in the US for US$350 million from Teva Pharmaceutical Industries.
The acquired portfolio consists of products that are being divested by
Teva as a precondition to its closing of the acquisition of Allergan's
generics business. The combined sales of the branded versions of the
products in the US is approximately $3.5 billion. Similarly, it acquired
over-the-counter (OTC) brands in cough-and-cold, pain and dermatology
categories from Ducere Pharma during May 2016.
Though, the
financial working of DRL will be under pressure in the first and second
quarter of 2016-17 on account of US FDA restrictions and exchange rate
movements, the long term prospect looks better with higher investments
in R&D, higher approvals, launch of new products and focus on highly
regulated markets.
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