Dr. Reddy’s Earnings: Strong Demand From Developed Markets Fuels Solid Second-Quarter Results

No-moat Dr. Reddy’s RDY 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.

India business reported 3% sales growth, weaker than developed markets, because of portfolio rationalization and pricing headwinds. The Indian government fixed ceiling prices for medicines in the National List of Essential Medicines, which includes a total of 870 scheduled drugs as of April 2023, with affected drugs facing an average ceiling price drop of over 15%. We expect this to continue weighing on the region in the near term but believe Dr. Reddy’s can somewhat offset pressures with further innovations as well as a recently launched direct-to-consumer marketing platform for nonprescription drugs.

Emerging markets, on the other hand, had a slightly disappointing quarter and posted a year-over-year sales decline of 1%. The firm launched 32 products during the quarter across the region, and we expect their contributions to provide tailwinds and put the segment back on the right track in upcoming quarters.

India and certain emerging markets tend to post higher gross margins compared with developed markets like the U.S. because of their branded generic market structure, and despite their relatively weak performances, we saw a sequentially flat gross margin for the quarter. We believe the firm is still enjoying nice boosts from generic Revlimid, which it launched last September, and certain cost-saving initiatives are paying off.