The shares of Dr Reddy’s Laboratories rebounded over the last two sessions after it touched its 52-week low last Friday, post-announcement of its fourth-quarter results.

There is renewed interest in the stock from the investor fraternity, in the belief that the ongoing regulatory issues have been factored into the share price, creating a buying opportunity for the medium term.

Last Friday, following the declaration of its Q4 results, the stock corrected to its lowest level in the last one year, shedding over 42 per cent from its peak seen in late July 2016. On Monday, the stock gained more than 3 per cent. Consecutively, the share price rose about 2 per cent in early trade on Tuesday.

The correction in the share prices can be attributed to regulatory inspections of its three facilities by the USFDA. The company received USFDA warning letters regarding deviations from current good manufacturing practices (cGMP) at its active pharmaceutical ingredients (APIs) plants at Srikakulam and Miryalaguda and for violations at its oncology formulation facility at Duvvada. These led to a disruption in supplies, delays in approvals and remedial costs. All this, in turn, impacted the revenue of the company badly.

The USFDA, however, completed its re-inspection of these facilities during March and April 2017 and issued a Form 483 with 11 observations. The issue of Form 483 implies that the USFDA has found minor deviations in manufacturing practices that need to be addressed. The remediation measures with respect to these key facilities is important for the company as they continue to weigh on the overall performance.

Q4 results

Dr Reddy’s Lab reported a 175 per cent growth in consolidated net profit to Rs 337.6 crore in the March quarter as against Rs 122.6 crore seen in the same period last year. The nearly three-fold jump in the bottom line was attributable to the low base in the corresponding quarter of Q4FY16, which was impacted due to the writing down of receivables worth Rs 400 crore from Venezuela.

Its consolidated net sales fell by around 5 per cent to Rs 3,498.5 crore from Rs 3,695 crore of the period in the last year due to lower North American sales.

For the full year FY 17, consolidated net sales were at Rs 13,866 crore, down 9 per cent year-on-year, while the consolidated net profit stood at Rs 1,292 crore, down 39 per cent over the last year.

Dr Reddy’s has a vertically integrated business model with three segments — global generics, pharmaceuticals services and active ingredients, and proprietary products. Around 82 per cent of its revenue is currently derived from global generics.

Muted US performance

The revenue from North America fell by 19 per cent in the fourth-quarter to Rs 1,535 crore as compared to the same quarter in the previous year, due to pricing pressure and increased competition in some generics such as Valgancyclovir. Lack of new launches due to regulatory clamp-down also impacted the revenue. The company’s North America business has accounted for 43 per cent of the overall revenue. As on March 2017, cumulatively, the company has 101 filings pending (99 ANDAs, 2 NDAs), of which 62 are Para IV opportunities and 21 FTFs. During the earning call, the management guided for about 10-plus launches in FY18.

Scale-up across Europe and EM

Gradual sequential improvement is seen in the revenue from emerging markets on account of the appreciation in the Russian Ruble and improving macros across geographies. The revenue from Russia for the fourth quarter grew by 26 per cent YoY to Rs 340 crore. Commercialisation of biosimilars across emerging markets has also seen meaningful traction. The European business reported strong growth on a YoY basis on the back of new launches.

The revenue from India rose by 8 per cent YoY at Rs 571 crore during the fourth quarter. This was impacted by demonetisation and the effect of price controls.

The Pharmaceutical Services and Active Ingredients (PSAI) business, which accounts for 15 per cent of the company’s revenue, declined around 6 per cent YoY during the quarter.

Operating profit was at Rs 630 crore. The EBITDA margin for the quarter stood at 18 per cent, a sequential decline of 24 per cent from the December quarter.

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