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New initiatives to help avoid Revlimid cliff

DRRD delivered a strong performance with Revenue/EBITDA/PAT growing 17%/11%/-8% YoY ahead of JMFe and street expectations. US business (8% beat) was led by gRevlimid ramp-up, albeit softer QoQ, was the primary driver. Complex launches and biosimilars will sustain momentum in this business over the medium term. NRT acquisition will reflect from 3Q further improving core margins. India business (in line) improvement was visible with around 9-10% ex-vaccines growth, with management confident of sustaining above market growth. Emerging markets (16% beat) was a star performer this quarter with Russia delivering 27% CC growth (sustainable per mgmt. commentary). The company remains upbeat on the GLP-1 opportunity and believes backward integration is DRRD’s strength. R&D spends were higher at 9.1% (full year guidance at 8.5-9%) with 36% spends concentrated on biologics/Aurigene and balance on generics/API. Higher S,G&A spends mirror growth in ex-US markets scale-up and excl. one-offs, is largely sustainable going ahead. Robust double digit growth across key markets, healthy but unappreciated US (and global) pipeline, NRT consolidation and attractive valuations lead to our positive stance. Maintain BUY with a revised Sep '25 TP of INR 1,655.

* US delivers robust performance: US business reported robust sales of INR 37.3bn (8% beat) growing 20% YoY. The improvement was driven by an increase in volumes, and was partly offset by price erosion. During the quarter, the company launched 4 new products and filed two new ANDAs with the U.S. FDA. As of Sep 30, 2024, 80 generic filings were approvals pending from the U.S. FDA.

* Nicotinell acquisition complete: DRRD closed the acquisition of Haleon’s global Nicotine Replacement Therapy (‘NRT’) OTC brands for GBP 458mn (an additional GBP 42mn is contingent consideration payable in CY25/26). This acquisition will help leverage customer relationships and give an opportunity to cross-sell. The management believe that 1. Focus on brand building 2. Increasing geographic reach and 3. Innovation on product development and lifecycle management will be key drivers of growth in this business. The acquisition alleviates concerns around managing gRevlimid cliff. Recent initiatives like Nestle JV, biosimilars, innovation, licensing deals, etc. pinpoint towards DRRD’s focus on growing its new businesses. With domestic growth catching up with market growth and Haleon brand acquisitions enhancing ex-Revlimid EPS, we believe there is an opportunity to unlock value here

* Vaccine portfolio helps drive India beat: Domestic sales grew 18%YoY (in line) to INR 14bn. Growth was supported by the Sanofi vaccine portfolio, adjusted for the acquisition, it grew in 9-10%. This is in line with management’s guidance of IPM outperformance. We believe India business will continue to deliver IPM-beating growth over the next few years (~12% CAGR). The company launched 3 new during the quarter (16 launches YTD).

* EMs strong; driven by Russia & RoW: EM grew of 20% YoY/ +23% QoQ to INR 14.6bn with Russia growing 18% YoY (27% in CC terms) despite unfavourable forex rate movements, growth was driven by price increases, higher volumes and product launches The management believes Russia can grow as fast as India, although this will be largely pricing-led. Revenue from RoW territories grew 32% YoY to INR 5.6bn driven by momentum in base business and contribution from new products. Europe grew 9% YoY (7% beat) to INR 5.8bn. PSAI grew +20%YoY /+10%QoQ (7% beat) to INR 8.4bn with YoY driven by momentum in base business, growth in service business and contribution from new products.

* Biosimilars: The biosimilars opportunity is going to be meaningful from 2027, with the launch of Abatacept (early CY27 opportunity) which is currently undergoing Phase 3 trials. The management indicated that a sizeable portion of its biosimilar R&D is dedicated to Abatacept. The company will likely see Rituximab and Denosumab USA launch in FY26, Europe launch for Rituximab in early CY25.

* Nestle deal – chasing the horizon: The management re-iterated that the deal (JV with Nestle) is one for the long-term and will see meaningful topline realisation only after a few years. This is primarily due to the time needed for the company to build scale and brand recognition for the new brands to be introduced through the JV but hey believe the stickiness of this business is a key strength of the segment. The company aim to scale this business and aim to become one of the largest Nutraceutical players. The deal was completed on Aug 1st, 2024 with DRRD holding a 51% stake in the JV as of 2Q25. The PAT attributable to minority interest was primarily recognition of deferred tax asset on account of transfer of business from the parent to the Nutraceutical subsidiary.

* GLP-1 opportunity: The management was confident; they can leverage the company’s superior R&D and manufacturing ability to seize the GLP-1 opportunity. They plan on being a Day-1 launch across all markets in Semaglutide and are preparing on capitalising on 14-15 GLP-1 products – most of which will fructify in the next decade. DRRD’s backward integration will enable the company to manufacture Semaglutide end-to-end, while the device will be procured through a CMO.

* Key financials:

*  Revenue/Adj. EBITDA/APAT of INR 80.2bn/22.1bn/13.7bn grew +17%/+11%/-8% YoY respectively and were +8%/+13%/+19% vs. our expectations and +4%/+2%/- 4% vs. Street expectations.

* Gross margin was 60% (vs. 59% YoY; vs. 60% QoQ) due to better product mix.

* Adj. EBITDA margin declined to 27.5% vs. 28.9% YoY/28.2% QoQ (JMFe: 26.4%).

*  During the quarter there were one-off expenses related to acquisition cost (~INR 600mn) and impairment of non-current assets related to gNuvaring (~INR 900mn)

* Capex for the quarter was INR 7.4bn while FCF was INR 2bn.

* The R&D expenses were at 9.1% of sales

* Net cash surplus as of 30th Sep’24 was INR 18.9bn.

* ETR guidance for FY25 remains ~25%.

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SEBI Registration Number is INM000010361