Dr. Reddy’s Earnings: Ends Year With Good Recovery, Strong Launches; Maintaining $60 Fair Value

Dr. Reddy’s Laboratories RDY 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.

Quarterly revenue grew 16% year over year. In the firm’s main generics segment, sales in North America grew 27% thanks to new product launches, offsetting some price losses, though with some help from favorable foreign-exchange rates. The firm has a solid pipeline going into 2024 to maintain new-launch sales. Sales in Europe grew 12% while emerging markets declined 7%, though this includes a decline in COVID-19-related sales. India posted 32% growth excluding divestment income and COVID-19 losses. The firm remains focused on increasing its footprint in India, where lower adoption of unbranded generics has allowed higher-margin branded generics to thrive.

Price erosion continued throughout the year but was not unusual, in our view. The commoditized nature of generic drugs somewhat insulates their manufacturers from losing margin when input costs spike. While some industries are struggling to raise prices in proportion to cost inflation due to consumer sensitivity or long fixed contract terms, the generic manufacturers face neither limitation. There is little room to absorb higher supply costs before they become unprofitable, so cost increases are typically passed on to distributors quickly.