Company Reports

No-moat Dr. Reddy’s reported fourth-quarter earnings that came in higher than we expected. Total sales were up 12.5% year over year as demand and prescription utilization trends continue their strong momentum and help the firm end its fiscal year on a strong note. On top of solid performance, Dr. Reddy’s was busy during the quarter with a number of notable highlights, including a launch of Versavo, biosimilar of Avastin (bevacizumab), in the UK that marks the firm’s first entrance in the region’s biosimilar market. Management also spent some time during the call discussing investments in fueling its biosimilars pipeline. We think this is a sound strategy given our positive long-term outlook on the biosimilars market, particularly the US, and we think Dr. Reddy’s is well positioned to utilize its scale and low-cost manufacturing to carve out a share in the marketplace. While we now expect higher operating expenses in later years of our valuation model as we believe the firm needs to allocate higher spending in both research and development and selling, general, and administrative to ramp up its pipeline, we think this will be more than offset by higher gross margin that biosimilars and complex generics carry. After updating our fiscal 2024 numbers as well as ticking up our long-term outlook for the firm, we raise our fair value estimate to $60 from $54 per share.

Dr. Reddy’s is one of the largest generic drug manufacturers in the world. Global generics make up over 85% of the firm's sales, and along with other generics manufacturers, it continues to suffer low- to mid-single-digit erosion year over year in developed markets like North America and the majority of Europe. Because price and margin headwinds exist predominantly in small-molecule oral tablets that are easy to produce, we expect Dr. Reddy’s future pipeline to focus on complex generics—drugs that have complex formulations, dosage forms, or are injected or have more complex administration. Complex generics are more difficult to manufacture which by nature limits competition. And since price, volume, and margin are highly dependent on the competitiveness of a drug, complex generics pave an opportunistic road for Dr. Reddy’s. A fourth of its North American sales comes from complex injectables and we expect this number to increase as the company prioritizes these offerings. But other players in the industry are employing a similar strategy so success in this area relies on the company’s ability to seek out profitable drugs and efficiently launching them to market.

No-moat Dr. Reddy’s reported solid third-quarter earnings with results largely in line with our expectations. Total sales were up 6.6% year over year as the core generics business continues to see healthy performance and the pharmaceutical services and active ingredients business rebounds. We maintain our fair value estimate of $54 per share.

No-moat Dr. Reddy's reported second-quarter results that were largely in line with our expectations. Total sales were up 9.1% thanks to strong volume mainly in the United States and Europe. The firm also benefited from less-severe price erosion, which typically fluctuates between high single digits to low double digits, compared with previous years in developed markets like the U.S. We maintain our fair value estimate of $54 per share.

No-moat Dr. Reddy’s reported first-quarter earnings that were significantly higher than we had expected. Total sales grew 29.2% year over year, the largest quarterly growth the company has posted in the last three years. Strong demand from recent and new launches as well as a weaker price erosion in Reddy’s base business fueled growth. After raising our near-term and medium-term top-line and margin outlook—as well as baking in time value of money impact—we raise our fair value estimate to $54 from $48.

Dr. Reddy’s is one of the largest generic drug manufacturers in the world. By our estimate, Dr. Reddy’s generics business makes up over 75% of company’s sales and, along with other generics manufacturers, it continues to suffer low- to mid-single-digit erosion year over year in developed markets like North America and majority of Europe. Because price and margin headwinds exist predominantly in small-molecule oral tablets that are easy to produce, we expect Dr. Reddy’s future pipeline to focus on complex generics—drugs that have complex formulations, dosage forms, or are injected or have more complex administration. Complex generics are more difficult to manufacture which by nature limits competition. And since price, volume, and margin are highly dependent on the competitiveness of a drug, complex generics pave an opportunistic road for Dr. Reddy’s. A fourth of its North American sales comes from complex injectables and we expect this number to increase as the company prioritizes these offerings. But other players in the industry are employing a similar strategy so success in this area relies on the company’s ability to seek out profitable drugs and efficiently launching them to market.

After taking a fresh look at Dr. Reddy’s, we have lowered its fair value estimate to $48 from $60 per share due to our revised future outlook of the company. Our updated forecast lies on a mid-single-digit top-line growth and an annual margin compression in its core generics portfolio as well as our updated analysis, shifting the company’s moat to no-moat from narrow.

Dr. Reddy’s is one of the largest generic drug manufacturers in the world. By our estimate, Dr. Reddy’s generics business makes up over 75% of company’s sales and, along with other generics manufacturers, it continues to suffer low- to mid-single-digit erosion year over year in developed markets like North America and majority of Europe. Because price and margin headwinds exist predominantly in small-molecule oral tablets that are easy to produce, we expect Dr. Reddy’s future pipeline to focus on complex generics—drugs that have complex formulations, dosage forms, or are injected or have more complex administration. Complex generics are more difficult to manufacture which by nature limits competition. And since price, volume, and margin are highly dependent on the competitiveness of a drug, complex generics pave an opportunistic road for Dr. Reddy’s. A fourth of its North American sales comes from complex injectables and we expect this number to increase as the company prioritizes these offerings. But other players in the industry are employing a similar strategy so success in this area relies on the company’s ability to seek out profitable drugs and efficiently launching them to market.

Dr. Reddy’s Laboratories posted solid fiscal 2023 fourth-quarter results as new product launches more than offset pricing losses and the decline in vaccine sales. The fiscal year ended roughly in line with our expectations, so we are maintaining our $60 fair value estimate and narrow moat rating.

Dr. Reddy’s reported strong third-quarter results driven by new product launches and currency tailwinds, outpacing price erosion across regions and upholding its narrow moat. We maintain our fair value estimate of $60 per share.

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.

No-moat Dr. Reddy’s reported strong product launches in its second quarter that offset the decline of its COVID-19-related product sales. We maintain our fair value estimate of $60 per share.

Dr. Reddy’s posted sound fiscal first-quarter results and appears to be on track to meet our forecast for the year. Beyond the usual price erosion and competitive pressures in the generics market, revenue was pressured this quarter in part by light sequential demand in Russia following stockpiling in that country in the prior quarter. The firm offset its modest top-line growth with strong product launches and divestment proceeds in the quarter, which are necessary activities for generic manufacturers to maintain market share. Adjusting for litigation proceeds and keeping in mind the temporary nature of the higher supply chain costs, we see this quarter as a solid start to the company’s fiscal year and maintain our $60 fair value estimate and narrow moat rating.

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.

Overall, we were pleased with Dr. Reddy's fiscal fourth-quarter results, both on a top- and bottom-line basis. The firm's continued efforts to grow market share and launch new products in North America and Europe have more than offset the decline from generic drug price erosion, to the slight detriment to gross margin. This is consistent with our longer-term expectations for the U.S. generic drug market, where deflationary pricing pressures have been a persistent market force. Our narrow moat rating on the company acknowledges these pressures and is primarily supported by the company's Indian business, where brand intangibles provide a buffer to margin. On a long-term basis, there were no developments that would warrant a change in our valuation assumptions. We are maintaining our $60 fair value estimate.

Overall, Dr. Reddy's reported a relatively uneventful third quarter, with higher revenue across the board largely due to new product launches and market share gain. On a sequential basis, however, generic drug price erosion in multiple geographies weighed on the company's top line. Additionally, sales of the company's COVID-19 drugs (including the Sputnik V vaccine and remdesivir) fell in India during the quarter, due to a significantly lower rate of infection in the country compared with the previous quarter. Despite the continued erosion of generic prices, the company was able to hold the gross margin flat at 53.8% on a year-over-year basis, largely due to favorable product mix and cost reduction measures. Overall, our expectations for the fiscal year remain unchanged, and we reiterate our $60 fair value estimate and narrow moat rating.

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.

Following an extensive review of the generic drug manufacturers under our coverage, we have revised our fair value estimates to better align with our expectations for revenue growth and margin erosion over the next five years. We are lowering our fair value estimate for Viatris to $14 per share from $25, lowering our fair value estimate for Teva Pharmaceutical to $9 per share from $20, and are raising our fair value estimate for Dr. Reddy’s Laboratories to $60 per share from $49. The shares of all three appear fairly valued in the market today. We are maintaining our no-moat rating and stable moat trend assessment for Viatris and Teva, as we believe heavy exposure to the U.S. and other pure generic markets where small-molecule generic drugs are highly commoditized will continue to pressure returns, despite the companies’ burgeoning investments in relatively more differentiated areas like complex generics and biosimilar drugs. We believe Dr. Reddy’s comparatively more differentiated approach lends itself to a narrow moat rating, with higher exposure to emerging markets (particularly India) where brand recognition translates to market power and stable pricing.

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.

Dr. Reddy’s posted solid second-quarter results. A confluence of factors led to strong top line growth, but we place this in perspective against the high costs of maintaining market share in this industry long-term. We maintain our fair value estimate of $49 per share and our no-moat rating.