Upgrading Dr. Reddy's Moat to Narrow Based on Branded Portfolio Strength in Emerging Markets

Dr. Reddy’s Laboratories is a global pharmaceutical company based in Hyderabad, India. It manufactures and markets generic drugs and active pharmaceutical ingredients in markets across the world, but predominantly in the United States, India, and Eastern Europe. Indian pharmaceutical manufacturers have seen success over the past decade in penetrating the U.S. market, where regulatory hurdles are lower than in Western Europe. With competition on price in a commodified space, the entry of low-cost manufacturers has facilitated a deflationary price environment for generic drugs since 2015, putting substantial pressure on the margins of established manufacturers. Conversely, in India and other countries with lower generics adoption, so-called “branded” generics have seen notable success. Brand generally supports customer loyalty and more-stable prices in these markets. Given the lack of public and private prescription drug insurance and a heavily fragmented supply chain in India, there are fewer catalysts driving the switch to unbranded generics.