Dr Reddys Laboratories Ltd Q4 FY2025 Concall Summary

Key Takeaways

• Record revenue, margin reset: Revenue exceeded \$3.8 bn with double-digit growth across all segments, but gross margin dropped 300 bps QoQ on one-off manufacturing costs and lower milestone income.
• gRevlimid cliff is priced in, base business is the bridge: Management guided double-digit ex-gRevlimid revenue growth and a ~25% EBITDA margin target post-patent cliff, funded by base business scale and productivity, not cost cuts.
• Semaglutide is the next big swing: Phase III trials are underway, submission planned by end of calendar 2025, and the company is gearing to launch in all viable markets during calendar 2026, starting with Canada in early January.
• Tariff posture is wait-and-see with a supply promise: No US manufacturing footprint exists today, but management pledged zero supply disruption under any scenario while conceding "nobody wants to absorb the tariff."
• What to watch next quarter: The pace of gross margin recovery toward normalized levels, any formal US tariff communication and its quantum, and semaglutide regulatory submission progress.

Revenue Performance & Segment Drivers

• North America Generics: Volume gains in key products and new launches drove growth, partially offset by low single-digit price erosion. Most products have exhausted their price erosion potential.
• gRevlimid dynamics: Price erosion continues but is accompanied by quantity increases. Sales are expected to finish a few months before the January 2026 patent cliff to avoid customer shelf-stock adjustments. Management declined to share quarterly distribution guidance.
• European Generics: Strong performance driven by NRT acquisition contributions, higher base business volumes, and new product launches, which together offset pricing pressures. The UK benefited from a high level of new launches and the bevacizumab biosimilar launch.
• Emerging Markets: Higher volumes and new product launches drove growth, partially impacted by unfavourable forex. Russia grew 27% YoY in constant currency but declined 13% sequentially.
• India business: Excluding the in-licensed vaccine portfolio, growth was 6%, driven by new product launches and favourable pricing, marginally outperforming IPM. FY25 growth of 16% was mostly inorganic, and similar ~16% growth is expected in FY26. Two underperforming areas, cardiovascular and gastrointestinal, have mitigation plans underway.
• PSAI: Growth driven by increased volumes, contributions from new API launches, and growth in the CDMO business.

Margin Walk & Cost Structure

• Gross margin decline: The 300 bps QoQ drop was driven by one-off manufacturing overhead costs including severance from the Shreveport plant divestiture, accounting provisions, lower out-licensing income versus Q3, and inventory overhead. Combined manufacturing overhead items impacted approximately 80 bps. Management characterized this as a one-off and expects margins to return to normal levels.
• NRT margin fluctuation: The Q4 versus Q3 delta of approximately 500 bps in PBT margin was due to integration costs. The normalized EBITDA margin for the NRT business is approximately 25%.
• Full year stability: Despite the Q4 drop, full year gross margin remained at 58.5%, consistent with FY24. EBITDA margin exceeded 29% for Q4 and 28% for the full year, with RoCE at 27.7%.
• SG&A increase: Driven by the acquired NRT consumer healthcare business, investments in commercial activities, and higher freight rates impacting logistics costs.
• R&D investment trajectory: Back-to-back approximately 20% annual growth over the last two years, with increasing investments in biosimilars including abatacept Phase III and complex molecules including all GLP-1s. Revenues from these efforts start in calendar 2027 for abatacept.
• Post-gRevlimid margin target: Management is targeting approximately 25% EBITDA margin post-lenalidomide era, funded by growing the base significantly faster than expenses while using productivity measures, not cost cuts. Margins may fluctuate quarter-to-quarter but the aim is to stay in that neighbourhood.

Israeli: "we are planning to grow the base significantly faster than the expenses, while using all kinds of productivity measures on the cost. It's not a cost cut. It's all kinds of productivity measures."

Semaglutide & Pipeline Bets

• Semaglutide launch timeline: The company is gearing up to launch during calendar 2026 in all markets where the IP landscape allows. Phase III trials are ongoing, and submission is planned by the end of calendar 2025.
• Canada first-mover ambition: Planning to be among the first to launch when market exclusivity ends in early January 2026. Approval timelines are expected "a little bit before the date, somewhere in the end of this calendar."
• Manufacturing route: Synthetic route for injectables in pen devices, semi-synthetic for the oral product.
• Competitive preparation: Preparing for both scenarios: a window of relatively limited competition initially, and a high-volume, low-price, very competitive landscape over time. No active marketing is planned as a brand; demand is expected to be strong enough on its own.
• Biosimilar pipeline progression: Denosumab biosimilar filing was accepted by the USFDA. Exclusive commercialization rights for daratumumab biosimilar candidate were secured from Henlius in the US and Europe. An agreement with Bio-Thera covers ustekinumab and golimumab biosimilar candidates for Southeast Asian markets. Europe biosimilar launch sequence is rituximab, bevacizumab, then denosumab and abatacept.
• Abatacept: Revenues are expected to start in calendar 2027.

Israeli: "we are preparing ourselves for the scenario in which we believe that we have a chance for relatively limited competition, but as well as prepare ourselves for the scenario of high volume, low price, very competitive landscape. We are gearing for both."

US Tariff Exposure & Supply Strategy

• Current posture: Management does not know the timing or quantum of potential tariffs and is preparing for scenarios. The main effort is to ensure sustainability of supply, working closely with customers on future inventories and new product demand.
• Supply commitment: Under any scenario, the company pledges it will not create a shortage or supply disruption to the US market, emphasizing a long-term commitment to the country.
• Manufacturing footprint: The company would like to have a US manufacturing footprint if the right asset opportunity arises, but is not doing specific activities to build one at this stage. It remains open to engaging if the right opportunity comes.
• Customer absorption question: When asked whether customers would be open to absorbing tariff impact, management stated "nobody wants to absorb the tariff" and that there will be an adjustment period, but did not indicate any customer willingness or contractual mechanisms.

Israeli: "under any scenario, we will not create shortage of supply or supply disruption to the US market. This is very, very important to us. We want to stay in the United States for many years."

Strategic Initiatives & Portfolio Moves

• NRT integration: The UK was successfully integrated at the start of May. The Nordics integration is on track for the next phase.
• Sanofi collaboration expansion: Introduced Beyfortus for RSV prevention in India.
• Sensimune launch: Launched an immunotherapy product for house dust mite-induced allergies in partnership with ALK-Abelló.
• Jan Aushadi participation: Commenced participation in the government program with one product.
• Shreveport divestiture: Divested the manufacturing facility in Louisiana, US, with associated severance costs recognized in Q4 manufacturing overheads.
• Regulatory milestone: The CTO-2 facility received VAI status from the USFDA following a successful GMP inspection in November 2024. Unannounced USFDA inspections occurred at CTO-3 and CTO-6 this year, and facilities are ready for such inspections.
• Capex outlook: FY26 capex is expected to be in a similar range as FY25, which was more than double the previous year. Major investments are directed toward peptides in both API and formulations, biosimilar facilities, and product-specific investments for complex molecules.

Guidance & Commitments

Key Metrics