Accumulate Dr. Reddy's Laboratories Ltd For Target Rs.1,400 by Prabhudas Liladhar Capital Ltd
Temporary supply disruption of Semaglutide
DRRD’s gets temporary setback with stoppage of Semaglutide supplies due to impurity issues associated with API. Company expect issue to get resolved by Oct/Nov 2026; any delay in re-entry into markets like Canada can take away first mover advantage. Our FY27E stands cut by 5% while FY28E largely remains unchanged. We have factor in USD 180mn of sales from Sema in FY28.
Company has been reporting OPM at 15-16% ex gRevlimid. Scale up in Sema along with reducing opex will be key to achieved 19-20% OPM. Further timely launches like bAbatacept can accelerate profitability from H2FY28E. We maintain our Accumulate rating on stock with TP of 1400/share (23x FY28E EPS). DRRD have been investing cash flow from gRevlimid to build pipeline across peptides, biosimilars and GLP products; benefits of that should be visible from FY27. At CMP, DRRD is trading at valuations of 21x P/E on FY28E. Delay in re-entry of Semaglutide beyond H2FY27 will be key risk to our call.
Stoppage of Sema commercial supply: DRRD has temporarily stopped commercial supplies of semaglutide due to an issue associated with the API used in the product. Mgmt. cited that the issue arose from the manufacturing process during API scale-up validation, where the reaction led to impurities, resulting in out-of-specification. The next step will be company revalidating process again and testing which should be completed by Sept/Oct 2026; post that commercial supplies may resume. The company may recognize an inventory write-down on the affected batches however no product recalls.
Canada market remains key:
Currently there are only two generic players (DRRD and Apotex) which have got an approval. We believe there are more 4-5 players towards getting approval. Any delay in commercial supply from DRRD will take away first mover advantage. There is no need to submit any documents to Canadian regulator or others as validation batches is a scale up process and does not change the specification. Management remains confident that demand to outpace supply and will continue to see pricing floor around USD 25-30/unit. Company now guiding to supply 6–7mn semaglutide pens in 2HFY27E vs 12 mn pens earlier in FY27
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