Dr. Reddy’s Drops as U.S. Business Seen Facing More Pressure

  • First quarter results Tuesday saw net profit fall 80 percent
  • Company says big new products not likely until second half

Dr. Reddy’s Laboratories Ltd. plunged on concerns that competitive pressures in the U.S., which helped cut profit last quarter by nearly 80 percent, may linger for the balance of the year with few new drugs to win back the lost revenue.

The stock dropped nearly percent 10 percent to 2,992.65 rupees as of 9:38 a.m. in Mumbai, the biggest decline since November. That follows on a nearly 5 percent drop Tuesday, when the drugmaker, India’s second largest by sales, reported lower quarterly results. Analysts from at least five firms, including those at HSBC, have cut their ratings on the stock to a sell or reduce recommendation since the earnings report, according to Bloomberg data.

Dr. Reddy’s "results confirmed our fears of a sharp earnings hit for Indian generics given the increased pricing pressure and concentrated portfolio in U.S.," Piyush Nahar, an analyst at Jefferies India Private Ltd. wrote in a note Wednesday downgrading the stock to underperform from hold. "Management indicated that there are more headwinds ahead."

Dr. Reddy’s U.S. business, its largest market, has come under pressure as increased competition eroded revenue that has been hard to replace after the company received a warning letter from the Food and Drug Administration last year over potential violations at three Indian facilities supplying the U.S. Such warnings can slow approval of new drugs intended for the U.S. market.

On a conference call Tuesday, Dr. Reddy’s executives said they had completed remediation efforts on the plants and were prepared to ask the FDA for a reinspection. They said they planned to reclaim the profits lost last quarter by growing revenue, and expected some "bigger" product launches to appear in second half of the year.

The company’s net profit plunged to 1.54 billion rupees ($22 million) in the quarter ending June 30 from 6.47 billion rupees in the same period last year, it said July 26th, citing competitive pressures in the U.S. and lost business in Venezuela as that country grapples with a shortage of foreign currency.

"The U.S. business has been hit pretty badly, and then you don’t have quite a lot of approvals to counter the pricing pressure in the U.S. market because of the warning letters on the facilities," said Hemanshu Srivastava, an analyst with KR Choksey Shares & Securities Pvt. Ltd., which lowered its ratings on the shares to accumulate from buy. "The U.S. business will be pressurized going forward until some big assets come into the picture."

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