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Mixed performance

Dr. Reddy’s Laboratories (DRRD IN) reported Q3FY25 revenue and EBITDA broadly in line with our estimates. Higher amortization and tax expense, and lower other income led to PAT missing our estimate by 15%. Growth in the US, India, RoW and PSAI businesses came in weaker, but Europe and Russia businesses compensated. We look at these as quarterly fluctuations and project all the businesses to grow for the full year. We cut our FY25E core EPS by 5% as we build in higher amortization expense and tax rate, but maintain FY26E and FY27E core EPS as we build in upsides from generic semaglutide and biosimilar opportunities (should kick in starting next year). We retain Buy with TP unchanged at INR 1,588.

US business weak in Q3; expect some pick-up: US revenues were flat YoY and down 10% QoQ. Management attributed the weak performance to lower sales of gRevlimid, and loss of market share in some of the base business products. The management guided for continued launch momentum and growth in the US – we expect the business to get back to growth path in the coming quarters. Biosimilars and peptide products could take over as growth drivers in the next 1-2 years. gVenofer, a large potential opportunity in the US, is however delayed as the approval did not come through in time.

Biosimilar pipeline ramping up: DRRD’s bRituxan (rituximab) is close to being approved in Europe and we expect approval for the US sooner than later. bProlia (denosumab) could see an FY26 launch. The most valuable product could be gOrencia, wherein DRRD could be among the first biosimilars to enter the US. All these are high-value products and have the potential to generate USD 40-100mn in revenues, in our estimates.

India weak; pick-up indicated: India business grew 14% YoY, helped by the newly acquired Sanofi vaccine portfolio. Organic growth at 5.5% was disappointing for the quarter. Management blamed certain issues in the GI and Cardiac portfolios, which are being addressed. We expect growth to revert to high-single digit, sooner than later. Newly launched innovative products and ramp-up in the nutritional supplement JV with Nestle will be significant medium-term value drivers.

Russia and Europe compensate: Constant currency (CC) organic growth in Russia and CIS came in strong above 20%. Growth in INR was hit by depreciation of RUB. Europe business was up 22% YoY. The acquisition of Nicotinelle brand added inorganically to growth. Growth in PSAI and RoW business was muted in Q3, after exceptionally strong growth in H1FY25 – such volatility is to be expected.

Retain Buy with TP at INR 1,588: We lower core earnings by 5% for FY25E as we build in higher amortization and tax expense. We maintain FY26E and FY27E core EPS estimates. DRRD trades at 15.8x FY26E core earnings. Sunset of the gRevlimid opportunity will likely cause a dip in revenue and profit in FY27. We believe this is already priced into the stock’s valuation. We retain Buy with TP at INR 1,588, which is 30x FY27E core earnings plus cash per share. Increased price erosion in the US generics market and delay in biosimilar product approvals are key risks.

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