New initiatives, faster Sputnik rollout can lift DRL | Economic Times

ET Intelligence Group: The June-quarter performance of drug major Dr Reddy’s Labs (DRL) turned out to be a washout for the Street. What aggravated matters further was the company getting a subpoena from the US market regulator to furnish documents on certain CIS geographies in relation to the complaint that alleged payments to healthcare professionals in violation of US anti-corruption laws were made.This caused the DRL stock to slump more than 10% on Tuesday — effectively wiping out the gains of the past three months. Revenues rose 12% and net profit declined by a percent over the prior year. Ebitda margin dropped 560 bps to 20.7%. The disappointing performance was caused by underperformance of the US and API businesses. Profitability was impacted due to price erosion, increase in inventory provisions related to few products and higher other expenditure. US business revenues suffered primarily on account of price erosion in the base business and adverse forex rates. The API, while being impacted due to high base year effect, also suffered volume and price declines. In contrast, there has been a near 70% surge in the revenues from the domestic market amidst the second covid wave — driven by improved sales of covid drugs, uptick in the sales of non-covid drugs, new product launches and increase in drug prices. The company is investing in brands in India, expanding into rural areas and spending on digitalising its sales effort, leading to an increase in selling expenses.DRL rolled out the Sputnik vaccine in India in May but is facing a shortfall on the imports of the second dose of the vaccine from Russia. The company is working with Russian Direct Investment Fund for ramping up sales. It is working with six contract manufacturing organisations in India for manufacturing readiness. Also, Russian trials for the one-dose Sputnik Light, once received, will be submitted to Indian authorities.DRL is facing challenges such as price erosion especially in the US and Europe, increase in commodity and solvent prices and investigation into the allegations of marketing practices in CIS markets in violation with US anti-corruption laws.84806199The management holds this quarter to be an unusual one and is confident that the operational performance and ebitda margin will improve in the coming quarters as full impact of new drug launches in the US plays out, API sales recover, and brand investments bear fruits. Enhancing the development pipeline, gaining market share in key products and digital innovation measures such as the launch of its digital health platform Svaas are factors that the company is banking on to drive growth.The company’s management has also alluded to DRL experimenting with forays into nutrition, direct-to-customer and digital health & wellness. These new initiatives have the potential to help the company chart growth over the medium and long term. In the short term, an aggressive and timely distribution of Sputnik vaccine holds a strong trigger for driving performance of DRL. Meanwhile, any adverse regulatory action or impairments arising out of any legal settlements may lend volatility to the quarterly performance.