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DRRD’s US business has sustained its strong momentum led by gRevlimid, ramp-up in base business and Mayne portfolio. On an elevated FY24 base, we expect DRRD to grow its US business in single digits over the next 2 years. A part of this will be driven by higher gRevlimid volumes and new launches, in our view. We acknowledge that 25+ meaningful launches over FY25-27 may not entirely offset gRevlimid cliff but it will drive healthy ex-Revlimid earnings. India business growth has remained tepid this year due to NLEM impact, brand divestments and price erosion in acquired portfolio; with base reset next quarter, we expect this to improve going forward. The management aspires to deliver IPM-beating growth via innovation / licensing deals (10 signed so far). Europe’s strong performance was driven by new launches and new tender wins. PSAI gross margin continues to improve. We continue to believe that DRRD’s strong compliance, prudent capital allocation and diversified geographic mix with a thrust on India and US will continue to create value. We assume coverage with BUY with a Dec’24 TP of INR 6585 (including gRevlimid option value of INR 410).

US delivers steady performance: US business reported sales of INR 33.5bn (8% beat) growing 10% YoY and 6% QoQ. The improvement was largely driven by an increase in market share (ms) of key products, volume growth and Mayne Pharma portfolio. We believe gRevlimid contribution is ~USD 105mn-115mn with EBITDA margin (ex-Revlimid) at c.22%. DRRD launched two products during the quarter and is on track to launch 20+ products in FY24. The management mentioned that the ramp-up of Mayne portfolio, is as per expectation. DRRD has an attractive US pipeline including 79 pending filings (including 41 Para IVs and 21 FTFs) of which 25+ products are meaningful products expected to be launched over FY25-27. DRRD received a PAI for bRituximab and expects approval earliest by April ’24.

India aspirations high on innovation, Europe reports 16% YoY growth: Domestic sales grew at a tepid 5%YoY to INR 11.8bn (in line), partly subdued due to NLEM impact, brand divestments and price erosion in acquired portfolio (double digit growth excluding these adjustments). DRDD reiterated its commitment to outperform IPM, this will largely be driven by innovation / licensing deals (10 deals signed so far). They aim to build brands that will grow 1.5x the market and expect meaningful growth from FY25. EM revenue grew of -2% YoY/ +6% QoQ to INR 12.8bn with Russia revenue declining 14% YoY due to unfavourable forex movement and high base business. The company expects significant growth from China and have received 9 approvals in the current fiscal. Europe grew 16% YoY (6% miss) to INR 5bn driven by new product launches, improvement in base business partly offsetting price erosion.

PSAI recovering: PSAI gross margin came in at 29% (vs. 4%YoY; 18%QoQ); it continues to be in double digits as indicated by the management earlier. PSAI revenue increased 1%YoY /1%QoQ (broadly in line) to INR 7.9bn driven by new product launches, and favourable forex movement partly offset by price erosion. The management expects volume ramp-up and collaborations to improve revenue going forward as new products substitute older ones.

Key financials: Revenue/EBITDA/APAT of INR 72.2bn/20.2bn/13.8bn grew +7%/- 2%/+11% YoY respectively and were +4%/+4%/+8% vs. our expectations and +3%/+2%/+13% vs. Street expectations. Gross margin was 58% (vs. 59% YoY; vs. 59% QoQ). EBITDA margin declined to 28% vs. 30.4% YoY/28.9% QoQ (JMFe: 28.1%). ExRevlimid EBITDA margin was ~22% for the base business. R&D expense was INR 5.6bn (8% of sales), with ongoing clinical trials on differentiated assets driving expense. Capex for the quarter was INR 3.1bn while FCF was INR 0.2bn. Net cash surplus as of 31th Dec’23 was INR 59.1bn. This cash surplus will be used to drive inorganic growth to achieve short-term and long-term objectives. ETR guidance remains 24-25%.

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SEBI Registration Number is INM000010361