Dr Reddy’s Q1 earnings quite in line; focus now shifts to key launches ahead

Dr Reddy’s Q1 earnings quite in line; focus now shifts to key launches ahead

Dr Reddy’s Q1 results were steady on the surface, but the underlying shift is hard to miss — a front-loaded year built on fading Lenalidomide tailwinds, and a pivot toward complex generics like Semaglutide and biosimilars to revive growth from FY27 onward.

Several brokerages had flagged risks going into the quarter — notably around the pace of Lenalidomide erosion, execution timelines for key launches like Semaglutide, and the slow build-up of newer platforms like CDMO and biosimilars.

Macquarie, in a July note, had downgraded the stock to ‘Neutral’, warning that the Revlimid taper could weigh more heavily on second-half earnings than previously assumed. This was partly addressed in the call, with management confirming that Q2 will mark the last quarter of meaningful contribution from Lenalidomide — implying a front-loaded FY26, in line with Street concerns.

Citi, which maintained a ‘Sell’ rating with a Rs 990 target, had suggested that Semaglutide expectations might be optimistic. However, Dr Reddy’s clarified that its Canada launch remains on track for January 2026, with capacity already secured via partners, partially addressing visibility concerns.

Morgan Stanley, which initiated coverage this month with an ‘Equal-weight’ stance, had highlighted uncertainty around monetisation of the biosimilars pipeline. Here, the company reiterated that Phase 3 readout for Abatacept is expected in November 2025, with continued investment in core R&D programmes despite margin pressure.

The company reported a 2 percent year-on-year rise in consolidated net profit to Rs 1,419 crore for Q1 FY26, while revenue grew 11 percent to Rs 8,545 crore. But the quarter also marked an 11 percent sequential decline in profit and a drop in gross margin to 56.9 percent, reflecting the early stages of its most lucrative product’s tapering.

Revlimid (Lenalidomide), which drove windfall profits over the last two years, is now firmly in decline. Management confirmed that Q2 would be the last quarter with meaningful contribution from the product, with revenues expected to fall sharply in the second half as more competition enters the market.

The focus has now shifted to Semaglutide, the GLP-1 agonist being pursued as a generic version of Ozempic/Wegovy. Dr Reddy’s reaffirmed plans to launch the product in Canada in January 2026, once exclusivity expires. Rollouts in 87 markets are expected through FY26–27. While the company has secured pen capacity of 10–12 million units via partners, its own Vizag facility will only come online in FY28 — a delay that could limit early upside.

Still, management was optimistic. “We aim to be among the first to launch in most markets. Demand indicators are strong,” CEO Erez Israeli said on the call.

Meanwhile, the US generics business — once Dr Reddy’s primary growth engine — contracted 17 percent YoY to $400 million, citing price erosion and customer order timing. The company expects to launch 20 products in the US this year, but made no mention of any high-value or exclusivity-led launches in the pipeline.

India revenue grew 11 percent YoY to Rs 1,471 crore, aided by both generics and branded launches. The Europe business rose 124 percent YoY, supported by the acquired nicotine replacement therapy (NRT) portfolio.

The company is scaling up its contract development and manufacturing (CDMO) operations. Its UK-based Origin Pharma unit is expected to clock $100 million in revenue in FY26, with a target of $250–300 million by 2030.

R&D spending stood at Rs 624 crore (7.3 percent of revenue), and may be dialled down to 6 percent if required. The Phase 3 trial for its biosimilar Abatacept remains on track for a November 2025 readout.

With Rs 2,922 crore in net cash and over $2 billion in capital flexibility, the company is also scouting for acquisitions, but gave no specifics.