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Dr. Reddy's Misses on Both Counts

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Dr. Reddy’s Laboratories (RDY - Free Report) reported third quarter fiscal 2013 earnings per American Depositary Share (ADS) of 40 cents, well below the Zacks Consensus Estimate of 55 cents and the year-ago earnings of 50 cents per ADS.

The company reported revenues of $522 million during the quarter, reflecting a year-over-year increase of 3%. Revenues during the quarter were well below the Zacks Consensus Estimate of $613 million.

Dr. Reddy’s had received a one-time benefit from the launch of generic olanzapine in the third quarter of fiscal year 2012 worth $99 million. Normalizing this effect, revenues were up 23% year over year.

Dr. Reddy’s launched 17 new products, filed 13 registrations for new products and also filed 13 drug master files (DMFs) globally.

All growth rates mentioned below are excluding the impact of the olanzapine profit share recorded in third quarter fiscal 2012.

Quarter in Detail

Dr. Reddy’s reports revenues under three segments – Global Generics, Pharmaceutical Services & Active Ingredients (PSAI) and Proprietary Products and Others. Revenues at the Global Generics segment were up 24% year over year to $380 million. Strong sales in North America and the market territories were primarily responsible for the growth displayed by the Global Generics division.

Generics revenue increased in North America (up 38%), Russia and other CIS (Commonwealth of Independent States) markets (up 32%), India (up 12%) and the rest of the world/RoW (up 42%).  However, generic revenues declined 20% in Europe.

Revenues in the PSAI climbed 28% to $130 million during the quarter.

Gross profit margin at Dr. Reddy’s was 53%. Selling, general and administration (SG&A) expenses amounted to $156 million, reflecting an increase of 12%. Research and development (R&D) expenses increased 34% to $37 million.

During the quarter, Dr. Reddy’s launched 8 new generic products and filed 4 abbreviated new drug applications (ANDAs) with the US Food and Drug Administration (FDA). The company has 65 ANDAs pending approval with the FDA, of which 35 are Para IV filings and 8 are first-to-file.

In the second quarter of fiscal 2013, the company had announced its intention to acquire Netherlands-based specialty pharmaceutical company, OctoPlus B.V. The deal is already under progress with 92.9% shares tendered in Dr. Reddy’s favor.

Our Take

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 Europe remains a concern.

The stock carries a Zacks Rank #2 (Buy). Another generic player, Mylan Inc. (MYL - Free Report) also carries a Zacks Rank #2. Currently, Cambrex Corporation (CBM - Free Report) and Valeant Pharma (VRX - Free Report) look more attractive with a Zacks Rank #1 (Strong Buy).

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