Reduce Dr Reddy`s Laboratories Ltd For Target Rs. 1,200 By Emkay Global Financial Services Ltd
The 2QFY26 margin performance of Dr Reddy’s was marginally weaker than our expectations (in line with street estimates; adjusted for one-offs), with the gross margin (GM) decline being sharper than our expectations (at 55%, GM logged at its lowest since the launch of gRevlimid) and largely a consequence of lower-than-expected gRevlimid sales. While the tight control on opex and R&D spends was the key positive (in addition to a strong domestic print), we note the street’s and our post-gRevlimid earnings estimates hinge on topline defense, with the benefit of cost control largely built in. We now see heightened uncertainty around the launch timelines/competitive landscape for both the key assets in the pipeline – Semaglutide in Canada (likely to be competitive even by the management’s own admission + 3 new filers since Jun-25 alone) as well as Abatacept (where risk mitigation around Bachupally might still fall short of ensuring an early FY28 launch of the IV version, in our view). Our lower-thanstreet earnings estimates are largely unchanged. We roll forward to Sep-27E EPS and raise our TP by ~4% to Rs1,200 (from Rs1,150); retain REDUCE.
Sharp miss in US sales offset by a strong domestic print
US sales at USD365mn were a meaningful miss, with gRevlimid sales (~USD100mn vs ~USD125mn estimated) being lower than estimates, owing to incremental pricing pressure. Domestic growth at 13% YoY was ahead of expectations, with the company witnessing no impact of GST-related disruptions. 2Q domestic revenue also saw a negligible contribution from the acquired Stugeron portfolio. EBITDA margin (24.6% vs 25.8% estimated), adjusted for one-offs, was marginally below our expectations (in line with the street’s estimate). PAT, adjusted for a product-related settlement income, was broadly in line and was partly aided by a lower tax rate.
KTAs from the earnings call
1) Expect the quantum of gRevlimid sales in 3Q to be lower than that in 2Q. 2) Dr Reddy’s has received a CRL to its Rituximab filing following the Sep-25 pre-approval inspection of its Bachupally biologics facility. 3) The company expects to receive feedback on its Semaglutide filing from Health Canada within the next few weeks. The company is awaiting the court’s decision on the Semaglutide litigation in India and will file an appeal if the verdict is unfavorable. 4) The company has rationalized a few pipeline products owing to heightened regulatory uncertainty/the market opportunity being eroded due to an increase in competitive intensity. 5) The company has >100 products in its US pipeline (including 20 complex generics; biosimilars and long-acting peptides among the key focus areas). 6) Remain on track to file Abatacept by the end of CY25 and launch the intravenous version in early CY27. The product will be filed from the Bachupally biologics facility, though the company will also pursue a tech transfer to a US CMO. The subcutaneous version will not require an additional clinical study.
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