Lack of strong launch pipeline keep brokerages neutral over Dr Reddy's Labs

Dr Reddy's Labs reported its highest-ever quarterly revenue in Q2.

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Despite reporting decent earnings for the July-September quarter, brokerages continue to maintain their neutral stance over Dr Reddy's Laboratories, bogged down by the lack of a strong drug pipeline.

Even though the company stepped up its research and development (R&D) spend to focus on ramping-up its biosimilars, generics as well as biologics segments, it still refrained from providing updates on the major drugs that it might launch in the near-term.

Brokerage firm Nuvama Institutional Equities highlighted the issue and stated that while it appreciates Dr Reddy's efforts to focus on developing complex high-value products, the firm still awaits it to show up in its filings and numbers. On the basis of this, Nuvama retained its 'reduce' call on the stock with a target price of Rs 1,215.

Jefferies shared a similar outlook and noted that a lack of major product launches for Dr Reddy's, coupled to elevated SG&A (Selling, General, and Administrative) costs means there are no near-term catalysts to aid the drugmaker's stock performance. Likewise, Jefferies held on to its 'underperform' call on the drugmaker, retaining its price target of Rs 1,130 for the stock.

Furthermore, Dr Reddy's has also hinted that it is vertically integrated and fully prepared to capture the GLP-1 (Glucagon-Like Peptide-1) and peptides’ opportunity with plans to direct 50 percent of the capex thereof. Nuvama sees promise in the GLP1 and other peptides’ opportunity for Dr Reddy's, however, another brokerage, Citi remains skeptical.

While Dr Reddy's refrained from giving out details on its planned product launches, it did announce plans to launch biosimilar Abatacept by 2027. Citi noted that the drug can be a meaningful product for Dr Reddy's if it manages to execute it by FY28. Citi also holds a 'sell' call on Dr Reddy's with a price target of Rs 1,110.

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Nuvama also awaits the monetisation of Abatacept (arthritis drug) along with denosumab (bone anti-resorptive drug), and rituximab (oncology drug) over 2026 or early 2027.

However, taking a contrasting view, Bank of America Securities, which has a 'buy' call on Dr Reddy's with a price target of Rs 1,530, sees multiple levers for Dr Reddy's to fill the void created after Revlimid goes off patent.

The impending 2026 expiration of Revlimid’s patent is anticipated to welcome more generic competition, likely putting pressure on the drug’s revenue potential. Revlimid, a high-value yet low-margin cancer treatment, has been a significant earnings driver for Dr Reddy's through FY24, and the company expects its contribution to remain robust throughout the current fiscal year. Management also views Revlimid as a substantial opportunity for Dr Reddy's in FY26, despite the competitive landscape expected post-patent expiration.

Dr Reddy's revenue surged by 17 percent to an all-time high of Rs 8,016 crore, with strong sales growth in North America primarily driven by volume increases, albeit partially offset by price erosion.

Despite this, it reported a 15 percent on year drop in its net profit for Q2 at Rs 1,255 crore, impacted by acquisition costs for the Nicotinell portfolio, government land tax, minority interest in Nestle, and impairment charges. The company's EBITDA margin for the quarter stood at 28.4 percent, a decline from 31.7 percent in the high base a year ago. Management expects EBITDA margins to remain stable at current levels through FY25.

At 09.50 am, shares of Dr Reddy's Laboratories were trading 2.1 percent higher at Rs 1298.95 on the NSE.

Also Read | Dr Reddy's R&D expenses to stay around 8.5% in FY25, to launch key biosimilar in 2027

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