Dr. Reddy’s Q1 FY17 Financial Results

HYDERABAD, India

Dr. Reddy’s Laboratories Ltd. (BSE: 500124) (NSE: DRREDDY) (NYSE: RDY):

Dr. Reddy’s Laboratories Ltd. (BSE: 500124) (NSE: DRREDDY) (NYSE: RDY) today announced its consolidated financial results for the first quarter ended June 30, 2016 under International Financial Reporting Standards (IFRS).

Q1 FY17: Key Highlights

• Consolidated revenues at Rs. 32.3 billion, year-on-year decline of 14%
• Gross Profit Margin at 56.2%, declined by ~490 bps over that of last year
• Research & Development (R&D) spend at Rs. 4.8 billion, year-on-year increase of 9%. Continued focus on building complex generics and differentiated products pipeline
• Selling, general & administrative (SG&A) expenses at Rs. 12.3 billion, year-on-year increase of 12%
• EBITDA at Rs. 4.0 billion, 12.3% of revenues
• Profit after tax at Rs. 1.3 billion, 3.9% of revenues

Co-chairman and CEO GV Prasad said: “We have come through a very difficult first quarter, with our top and bottom lines impacted by a decline in volume growth, particularly in the US market and the loss of business in Venezuela. We also faced a number of challenges in the quarter including price erosion and delayed launches as a result of the warning letter, which significantly impacted our earnings. However, we continue to take actions that focus on remediation, strengthening our quality systems and executing on our strong product pipeline. We remain focused on generating long term, sustainable growth.”

Segmental Analysis

Global Generics

Revenues from Global Generics segment are at Rs. 26.6 billion, year-on-year decline of 14%; decline primarily on account of lower contribution from North America and loss of sales from Venezuela.

• Revenues from North America at Rs. 15.5 billion, year-on-year decline of 16%. Decline primarily on account of increased competition primarily in valgancyclovir and azacitidine, coupled with pricing pressure and moderation in volumes off-take.

  As of 30^th June, 2016, cumulatively 78 generic filings are pending for approval with the USFDA (76 ANDAs and 2 NDAs under 505(b)(2) route). Of these 76 ANDAs, 50 are Para IVs out of which we believe 18 have ‘First to File’ status.

• Revenues from Emerging Markets at Rs. 4.3 billion, year-on-year decline of 26%.
  • Revenues from Russia at Rs. 2.3 billion, year-on-year growth of 2%. Moderate growth primarily on account of depreciation of Ruble, in constant currency revenues grew by 23% year-on-year. Sequentially, the revenues have been stable.
  • Revenues from other CIS countries and Romania market at Rs. 0.7 billion, year-on-year decline of 15%.
  • Revenues from Rest of World (RoW) territories at Rs. 1.3 billion, year-on-year decline of 53% primarily on account of no sales in Venezuela. Ex-Venezuela it grew by 19%.
• Revenues from India at Rs. 5.2 billion, year-on-year growth of 10%. NPPA pricing notifications and the WPI based annual price decline impacted growth. Portfolio acquired from UCB well-integrated into our supply chain.
• Revenues from Europe at Rs. 1.6 billion, year-on-year decline of 16%.

Pharmaceutical Services and Active Ingredients (PSAI)

• Revenues from PSAI at Rs. 4.7 billion, year-on-year decline of 16%. Decline primarily on account of lower dispatches in API business on account of the ongoing remediation activities.
• During the quarter, 19 DMFs were filed globally of which 2 were in the US. The cumulative number of DMF filings as of 30^th June, 2016 was 784.

Proprietary Products (PP)

Subsequent to the approvals received from USFDA for 2 NDAs, the company had launched these two molecules Zembrace™Sym Touch™ (Suma 3 mg) injection and Sernivo™ (betamethasone dipropionate) Spray, 0.05% in the US. The performance of these two molecules is gradually picking up traction.

Income Statement Highlights:

• Gross profit margin at 56.2% and declined by ~490 bps over that of previous year primarily led by increased competitive intensity in some of the key products in NAG and relatively lower price realizations. Gross profit margin for Global Generics (GG) and PSAI business segments are at 61.3% and 24.1% respectively.
• SG&A expenses at Rs. 12.3 billion, year-on-year growth of 12%. This increase is largely due to the ongoing remediation activities, launch related activities for the approved NDAs by PP and certain routine items related to manpower and other spends.
• Research & development expenses at Rs. 4.8 billion, year-on-year growth of 9%. As a % to sales R&D expenses stood at 14.8% in Q1 FY17 as compared to 11.7% in Q1 FY16. Continued focus on building complex generics and differentiated products pipeline.
• Net Finance income at Rs. 445 million compared to the net finance income of Rs. 216 million in Q1 FY16. The incremental charge of Rs. 229 million is on account of:
  • Net foreign exchange gain of Rs. 36 million in the current quarter vs net foreign exchange loss of Rs. 88 million in the previous year.
  • Increase in profit on sales of investments by Rs. 54 million.
  • Net increase in interest income of Rs. 51 million.
• Profit after Tax at Rs. 1.3 billion
• Diluted earnings per share is at Rs. 7.4
• Capital expenditure is at Rs. 3.2 billion.

Earnings Call Details (06.30 pm IST, July 26, 2016)

The Company will host an earnings call at 06.30 pm IST on July 26, 2016, to discuss the performance and answer any questions from participants.