Solid Quarter at Dr. Reddy's

Dr. Reddy’s Laboratories (RDY - Snapshot Report) reported second quarter fiscal 2013 earnings per American Depositary Share (ADS) of 50 cents, well above the year-ago earnings of 30 cents per ADS. Higher revenues boosted earnings.

The company reported revenues of $544 million during the quarter, reflecting a year-over-year increase of 27%.

Quarter in Detail

Dr. Reddy’s reports revenues under two segments – Global Generics and Pharmaceutical Services & Active Ingredients (PSAI). While revenue at the Global Generics segment jumped 25% to $380 million, PSAI revenue climbed 33% to $149 million during the quarter.

Generics revenue soared in North America (up 47%), driven by limited competition for the company’s generic version of Pfizer’s (PFE - Analyst Report) Geodon (ziprasidone), Astellas Pharma’s Prograf (tacrolimus), GlaxoSmithKline’s (GSK - Analyst Report) Arixtra (fondaparinux) and Bristol-Myers Squibb Company (BMY - Analyst Report) and Sanofi’s (SNY - Analyst Report) Plavix (clopidogrel). Revenues were also boosted by products from Shreveport facility and the ramp-up in the antibiotics portfolio.

Generics revenues also increased in Russia and other CIS (Commonwealth of Independent States) markets (up 14%), India (up 12%) and the rest of the world/RoW (up 50%). However, generic revenues declined 16% in Europe due to disappointing performance in Germany.

Gross margin at Dr. Reddy’s remained flat at 53.1%. Selling, general and administration (SG&A) expenses amounted to $151 million, reflecting an increase of 11%. Research and development (R&D) expenses increased 21% to $33 million.

During the quarter, Dr. Reddy’s launched 4 new generic products and filed 4 abbreviated new drug applications (ANDAs) with the US Food and Drug Administration (FDA). The company has 63 ANDAs pending approval with the FDA, of which 33 are Para IV filings and 7 are first-to-file.

A few days back, the company had announced its intention to acquire Netherlands-based specialty pharmaceutical company, OctoPlus N.V. Dr. Reddy’s has offered €27.39 million for all issued and outstanding ordinary shares of OctoPlus, representing a 30% premium over the latter’s closing share price on October 19, 2012. We believe that the acquisition will benefit Dr. Reddy’s complex injectables pipeline. Dr. Reddy’s expect the deal to close by the end of the current fiscal year.

Our Recommendation

We are pleased with Dr. Reddy’s geographic reach and product depth along with a robust generic product pipeline. However, the company’s performance in the Europe remains a concern.

We currently have a Neutral recommendation on Dr. Reddy’s, which carries a Zacks #2 Rank (short-term Buy rating).