Markets
New businesses and partnerships hold the key to Dr Reddy's growth
Summary
- With a crucial product in the US set to go off-patent in January 2026, the company has adopted a multi-pronged strategy comprising partnerships, acquisitions and new products to boost revenue.
Dr Reddy’s Laboratories Ltd (DRL) stock fell more than 3% on Wednesday after the company posted worse-than-expected March quarter (Q4FY24) results, with higher R&D spends hampering profitability.
The company’s revenue fell 2% sequentially to ₹7083 crore, but the drop in Ebitda was steeper at nearly 12% to ₹1,784 crore. DRL’s US sales dropped 2.2% sequentially, driven by lower Revlimid sales and price-erosion in a few other molecules.
Some analysts reckon DRL’s US revenue from Revlimid, a key product, may well have peaked in FY24. If that's the case, the big challenge for DRL in the coming quarters is to build alternative revenue streams before Revlimid goes off-patent in January 2026.
Fingers in many pies
The company is already working toward this, having adopted a multi-pronged strategy involving partnerships and licensing agreements for complimentary products; acquisitions; and a focus on developing new products.
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DRL has formed separate partnership agreements with Sanofi and Bayer to distribute some of their products in India, and has another licensing agreement with a US company. In April, it formed a joint venture with Nestle for nutraceutical brands.
As for acquisitions, the company bought a women’s health products business in the US and has been looking for more opportunities. It had acquired a cardiovascular brand from Novartis in FY23 for about ₹500 crore. With almost ₹6,500 crore of surplus cash, it has enough leverage to scout even bigger opportunities.
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Dr Reddy's has also launched two new products in the UK and a wearable device in Germany and South Africa. The company launched 21 new molecules in the US in FY24 and is preparing to launch more than 20 in FY25. Its R&D spend jumped 24% in Q4FY24 and 18% in FY24 as a whole.
Taking stock
Though the company is in the thick of the action, there is still uncertainty about when these businesses will start adding to the topline.
Regarding its JV with Nestle, the company has said it will take time and investment to bring those brands to India and that it expects them to contribute significantly to revenue only two or three years down the line.
DRL also indicated during the investors’ call that despite all its R&D expenditure on Biosimilars, it expects that this portfolio won't begin generating meaningful revenue before FY27.
Put together, these factors should prevent any sharp upside in the stock, which has gained around 23% over the past year.
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