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Dr. Reddy’s Laboratories (RDY - Analyst Report) reported third quarter fiscal 2012 earnings per American Depositary Share (ADS) of 60 cents, significantly above the year-ago earnings of 30 cents per ADS. Higher revenues boosted earnings.

Quarter at a Glance

The company reported revenues of $522 million during the quarter, reflecting a year-over-year increase of 46%. Dr. Reddy’s reports revenues under two segments – Global Generics and Pharmaceutical Services & Active Ingredients (PSAI). While revenues at the Global Generics segment jumped 57% to $402 million, PSAI revenues climbed 12% to $105 million during the quarter.

Generics revenues soared 133% in North America, 15% in Russia and other CIS (Commonwealth of Independent States) markets, 14% in Europe and 11% in India. Growth was mainly driven by the launch of a generic version of Eli Lilly & Co.’s (LLY - Analyst Report) Zyprexa (olanzapine) 20 mg. Dr. Reddy’s currently has 180-day marketing exclusivity for the generic drug. Since generic Zyprexa was launched in the third quarter of fiscal 2012, the exclusivity runs till the fourth quarter of fiscal 2012. The company expects the Generic segment revenues to benefit from the generic launch even in the fourth quarter but not as much as in the third quarter.

Additionally, new product launches aided Generic segment revenues and the Pharmaceutical Services segment mainly contributed to PSAI revenues. Both the segments gained from exchange rate fluctuation.

Gross margin at Dr. Reddy’s inched up from 59% in the year-ago quarter to 60% in the reported quarter. Gross margin improved due to higher revenues and exchange rate fluctuation.

Selling, general and administration (SG&A) expenses amounted to $145 million, reflecting an increase of 20%. Higher freight charges, increased manpower and exchange rate fluctuation led to the rise in SG&A costs.

Increased research and development (R&D) activities led to a 16% surge in R&D expenses, which came in at $29 million.

During the quarter, Dr. Reddy’s launched 33 new generic products, filed 16 new product registrations, and 7 drug master files (DMF) globally. The total number of abbreviated new drug applications (ANDAs) awaiting US Food and Drug Administration (FDA) approval were 79 at the end of the quarter. Of the 79 ANDAs, 40 were Para IV filings and 10 are first-to-file.

Our Take

We currently have a Neutral recommendation on Dr. Reddy’s. The stock carries a Zacks #2 Rank (Buy rating) in the short-run. We expect generic Zyprexa to continue contributing to the company’s revenues, given the drug’s exclusivity till the fourth quarter of fiscal 2012.

Moreover, we believe Dr. Reddy’s is in a strong position to benefit from the huge potential presented by the US generics market, as quite a few blockbuster drugs such as Johnson & Johnson’s (JNJ - Analyst Report) Concerta and Pfizer Inc.’s (PFE - Analyst Report) Lipitor have lost patent exclusivity and more drugs are slated to go off-patent in the coming years.

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