Dr Reddy's Labs Q1 Preview: Tepid US sales likely to put brakes on earnings growth

Dr Reddy's Laboratories is slated to release its results for the April-June quarter of FY25 on July 27.

Pharmaceutical major Dr Reddy's Laboratories is slated to release its results for the April-June quarter of FY25 on July 27. Largely flattish sales in the US amid rising competition in key drugs, combined with increased research and development spends are expected to weigh on the drugmaker's net profit in Q1.

According to a Moneycontrol poll of eleven brokerages, Dr Reddy's Laboratories' revenue is estimated to grow 7.5 percent to Rs 7,242 crore in Q1 of FY25, compared to Rs 6,738 crore recorded in the same quarter of the previous fiscal. Net profit is predicted to fall 3.6 percent to Rs 1,351 crore, down from Rs 1,402 crore in the year-ago period.

There's significant contrast when it comes to brokerages' expectations regarding Dr Reddy's Q1 earnings performance. The most optimistic forecasts predict around 16 percent profit growth, while the most pessimistic predict a 15 percent decline.

Among brokerages, Elara Capital anticipates the strongest profit growth for Dr Reddy's. On the opposite end of the spectrum stands Nomura, which forecasts the weakest net profit for the drugmaker, citing heightened competition in key products in the US.

What factors are driving the earnings?

Dr Reddy's Q1 earnings will rely heavily on the contribution from blockbuster cancer drug Revlimid, especially at a time when other key products in the US are facing increased competition. The product mix will also be a key factor determining the margin performance of the drugmaker.

Competition in US business: The pharma company is facing increased competition in ear drop medication Ciprodex and cardiovascular drug Vascepa, which is expected to impact its US sales in the quarter. Nomura factors in a $20 million decline in sales in the US.

In addition, a high base of the year-ago quarter will also weigh on Dr Reddy's growth in Q1. The firm had recorded its highest ever US sales in Q1 of the previous fiscal. However, expectations of double-digit growth in domestic sales are expected to somewhat offset the increased competition in key US drugs.

Revlimid sales: The drugmaker generates 60 percent of its revenue from the US market, and within that segment, it is Revlimid that has been the biggest sales contributor for the company since its launch. Hence, revenue contribution from Revlimid remains crucial for the drugmaker's topline growth, especially as it is the only major upside trigger for the company.

Analysts at Kotak Institutional Equities pegged Revlimid sales to be around $110 million in Q1, higher than its near $100 million contribution in the past quarter.

R&D expenses: The company has been spending more on R&D in the last couple of quarters, largely towards the development of complex drugs to ensure future growth. However, at a time when US sales growth seems unlikely, the high R&D bill is expected to drag down the drugmaker's operating margins.

Nuvama also anticipates higher R&D costs (as a percentage of sales) to sustain for the next couple of years due to Dr Reddy's pipeline for the Horizon 2 program, which includes biosimilars and complex products. Likewise, Moneycontrol's poll of nine brokerages estimated Dr Reddy's EBITDA margin at 27.3 percent in Q1, sharply down from 30.5 percent recorded in the year-ago period.

What to look out for in the quarterly show?

Analysts and investors will closely watch the management's guidance on R&D expenses and EBITDA margin for FY25, as well as the areas of inorganic growth the drugmaker might target. Additionally, attention will be on identifying the expected revenue contribution from Revlimid in FY25.

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