Dr Reddys Laboratories Ltd Q1 FY2024 Concall Summary

Key Takeaways

• Strong quarter, Lenalidomide-led: Consolidated revenue grew 29% YoY, with North America up 69%, driven by Lenalidomide sales, new launches, and the Mayne portfolio integration. Underlying growth, adjusted for brand divestment income, was 35% YoY.
• Margins expanded sharply: Gross margin hit 58.7%, up ~880 bps YoY, and EBITDA margin reached 31.7%, fueled by favorable product mix, supply productivity, and operating leverage. Management is comfortable sustaining above its 25% benchmark.
• US base business showed unusual strength: Even excluding Lenalidomide, volume-led growth was healthy, aided by competitor supply disruptions, favorable RFP timing, and lower-than-normal price erosion on the base portfolio.
• India reset underway, not yet visible: Reported revenue fell 14% due to a brand divestment and NLEM price cuts; excluding these, growth was in very high single digits. The newly launched trade generics division targets the 50% of the market Dr. Reddy's did not previously address.
• What to watch next quarter: Whether the PSAI business recovers from its inventory destocking dip, the pace of Mayne portfolio contribution as customer bids open, and any update on the E-7777 approval expected by December/January.

North America: The Lenalidomide Effect and Base Business Surprise

• Lenalidomide anchor: Current sales levels are expected to continue, fluctuating quarter-to-quarter based on supplier orders and customer preference, and remain an important segment until the agreement's likely end in January 2026. Management declined to share volume share data, citing agreement restrictions.
• Base business volume surge: Growth was primarily volume-based, driven by timing of RFPs, competitor supply and service disruptions, and specific customer agreements. Price erosion on the base was relatively lower than normal, a tailwind management believes can continue in the near term.
• Mayne portfolio ramp: The integration closed and selling began in late April; the main pickup is expected in coming months as customers open bids, making the contribution more significant in subsequent quarters.
• Launch momentum: Regadenoson Injectable launched in April and is progressing well in market share. Management expects launch momentum to continue through FY24 and can sustain activity levels post-Lenalidomide with a pipeline of high-value products, though it declined to name specific launches.

Israeli: "these kind of levels of sales of Lenalidomide likely to continue and fluctuate from a quarter-to-quarter based on the supplier, based on the orders and based on the preference of customers. But we believe that it will continue to play to be an important segment products until the end of the agreement, which is likely to be in January '26."

Margin Structure and Cost Levers

• Gross margin drivers: The 880 bps YoY expansion came from favorable product mix, supply productivity savings, and better manufacturing leverage, partially offset by the absence of brand divestment income from the prior period. Softening solvent prices and freight rates are additional positive drivers, while price erosion remains a headwind.
• SG&A leverage: SG&A as a percentage of sales fell 340 bps YoY to 26.3% on better operating leverage. Absolute spend will trend slightly higher, but as a percentage of sales it will remain positive due to top-line growth.
• EBITDA comfort zone: Management maintains its long-term average target of 25% EBITDA margin, acknowledging that with Lenalidomide it will probably be above that level. The company is comfortable this will fully finance all growth aspirations and will not go below 25% even including innovation investments.

Israeli: "I'm still maintaining the long-term average of the 25-25, knowing that right now with Lenalidomide, we will probably be above it. And -- but overall, this is the area that I'm still maintaining that we feel very comfortable that will allow us to fully finance all of our growth aspirations of the future."

India: Resetting for the Next Leg

• Reported decline masks underlying growth: The 14% YoY de-growth was driven by brand divestment income in the base period, revenue loss from the divested portfolio, and NLEM-related price reductions. Excluding these one-offs, the business grew in very high single digits, led by branded generics and key brands.
• Trade generics entry: A dedicated trade generics division was launched in July, targeting the roughly 50% of the Indian retail pharmaceutical market the company did not previously participate in. The rollout will cover all states across India, with no meaningful contribution in Q1.
• Innovation as the top-five lever: Management's stated path to reaching the top five in India is through launching innovation, with tens of agreements expected. Innovation is seen as the primary value driver to double sales in the coming years.

Israeli: "The way to do that for us is by launching innovation."

Emerging Markets and Europe: Broad-Based Momentum

• Russia surge: 77% YoY growth was driven by a seasonal pickup in the allergy season, growth of big brands, and a lower base. The market remains volatile with quarter-to-quarter fluctuations, but the company is growing ahead of the market and believes momentum will continue.
• Broad EM strength: All emerging markets are growing in double digits, not just Russia. Europe is expected to see continued launch impetus through the balance of the year.
• China building: Four product approvals were received in China since April 2023, including partner products. More significant growth is expected in FY25, but growth will already be visible in FY24, with an aspiration to see 2x growth in three years from a baseline of approximately USD 18 crore.

Pipeline, Partnerships, and Capital Allocation

• Biosimilars timeline: The company is working on about 11 biosimilars, with the first launches expected around the beginning of 2027, some before 2030 and some after. The BLA for proposed biosimilar Rituximab (DRL_RI) has been accepted for review by the US FDA, EMA, and MHRA, with a launch timeline of 12 to 18 months depending on approval.
• E-7777 nearing: Approval is expected in the next quarter or the third quarter, around December or January.
• Capital allocation discipline: The first priority is strategic fit, the second is the right price. Acquisitions in India and Emerging Markets would rank higher than other geographies. The company will not chase deals simply because of cash on the balance sheet.
• PSAI recovery expected: The sequential decline of 14% was due to lower volume pickup by customers and inventory destocking, a timing issue management expects to correct relatively fast, starting from Q2. The API business is still expected to grow this year.

Agarwal: "We are not going to chase acquisitions just because we have cash in the balance sheet."

Guidance & Commitments

Key Metrics