Dr Reddy's Shines With Record FY 2006/07 Revenues

Thumping Growth Recorded at Fiscal-Year End

Dr Reddy's Laboratories registered a surge of 168% in its total revenues in FY 2006/07 (ended 31 March 2007) at US$1.5 billion. The rise in sales is being attributed to its authorised generics and 180-day marketing exclusivities from ondansetron, fexofenadine, and sertraline, enhanced performance from the U.S. generics business, inclusion of its German acquisition Betapharm, and its Mexico facility. The Indian firm said that revenues from authorised generics contributed 24% to total revenues during the year. Research and development (R&D) costs rose this year against a drop last year, reflecting the increasing investments in its generics business. The company realised 454 million rupees (US$11.2 million) from its ICICI venture partnership during the year. Selling, general and administration (SG&A) expenses increased by 75% during the year and 50% during the fourth quarter due to consolidation of its two acquisitions. The fourth quarter recorded significant expansion in margins aided by ondansetron exclusivity and higher margins in the Active Pharmaceutical Ingredients (API) and Custom Pharmaceutical Services (CPS) businesses.

In terms of segment-wise revenues, generics reported the strongest sales growth at 719% with US$771 million. APIs were higher by 44%, with international sales contributing US$226 million and accounting for 82% of total API sales. Branded formulations were higher by 24% at US$286 million, with Indian sales dominating at US$149 million. Russia, Romania, Venezuela and the CIS region contributed to the international sales rise for branded formulations. Emerging businesses were at US$19 million, and CPS recorded a 397% growth at US$153 million for the full-year period. For the CPS business, Dr Reddy's attributes the rise to customer base and product portfolio with contribution from its Mexico facility brining in 5.39 billion rupees. Gastrointestinal products top its revenues by therapeutic segment in its branded formulations market in India with US$30 million, followed by the cardiovascular segment at US$28 million; pain, paediatrics and diabetes together contribute US$47, completing the top five segments.

Geographic Footprints Expanded

International revenues for Dr Reddy's were higher by 250% at 56 billion rupees (US$1.4 billion), contributing 86% of sales as opposed to 66% in the last fiscal year. U.S. sales ensured North America's dominance at the top of the table, dethroning the company's India sales, which remained at US$213 million. API sales for North America were at US$47 million, but generic formulations were the mainstay, accounting for 71% of total sales. Combined revenues of simvastatin, finasteride (both authorised generics), fexonfenadine and ondansetron (180-day exclusivity) pushed up generic formulations to 23.6 billion rupees. The company launched eight new products in the United States. European revenues were up, mainly due to the inclusion of Betapharm, which brought in US$223 million. The U.K. market struggled yet again in generic formulations, reporting a decline in sales at 1.5 billion rupees due to the declining pricing trends of omeprazole and amlodipine. Indian revenues were up 11%, accounting for 14% of total revenues, with key brands Nise, Stamlo, Razo and Omez driving growth. New products contributed 247 million rupees, the company said.

Outlook and Implications

Despite doubts over the company's performance after its shock reported loss last fiscal, Dr Reddy's has bounced back with high marks. While authorised generics and the 180-day exclusivity contributed to the sales growth, the upsurge in the company's underlying base operations has reinstated confidence in the long-term growth story. Significantly, the firm outlined its biologics and oncology portfolio plans, also confirming that its investments in the biogenerics segment will begin to shape up in the current year. The company has made a head start in launching two biologics in the Indian market so far. The return of U.S. sales into positive territory holds another confidence boosting turning point for Dr Reddy's. The company's decision to snap ties with Leiner Healthcare, its long-term over-the-counter (OTC) distribution partner in the United States, is further indication of its growing confidence in the strength of its field force. In addition, the company's negotiations with retail giant Wal-Mart on prescriptions drug supply is expected to progress in the forthcoming quarters.

In the year ahead, Dr Reddy's is planning to aggressively push its new product launches, with 15-20 planned. G.V. Prasad, the company’s CEO, however, issued a cautious note on profitability, highlighting the absence of ”special opportunities” such as authorised generics. The company is expected to put its boosted supply-chain system to test in the forthcoming year as the number of launches grows and its international operations expand. Adapting to its new cost structure in Germany, with a re-organised sales force focusing on physicians, pharmacies and insurance firms, will be key. In the short term, India is expected to register a growth rate above industry average—a double-digit figure. Italy, New Zealand, Spain, Brazil and Australia are the markets that will be targeted.

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