Revlimid overdose boosts Dr Reddy’s Q3 earnings, but turns brokerages cautious

While Dr Reddy’s recorded its highest-ever quarterly revenue in Q3, most of the growth was fueled by a higher-than-expected contribution from cancer drug Revlimid while the base US and India business delivered a subpar performance.

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Dr Reddy’s Laboratories reported strong earnings for the October-December quarter as higher-than-expected contribution from the blockbuster cancer generic Revlimid offset subdued sales in the US and India base business.

However, the pharma major’s heavy dependence on the cancer drug has triggered caution among brokerages.

The company’s revenue has picked up sharply since Q1 with Revlimid contribution continuing in Q2 as well as in Q3. Brokerage firm Citi highlighted an increase in Revlimid contribution on-quarter by around $5-15 million in Q4, which indicates that the drug may continue to command a higher share in the company’s topline through FY24-26.

Aided by higher Revlimid sales, the drugmaker delivered its highest-ever quarterly revenue of Rs 7,214.8 crore, up 6.6 percent from the year-ago period and also topped the Moneycontrol estimate of Rs 7,030.9 crore. Net profit for Q3 also rose nearly 11 percent on-year to Rs 1,378.9 crore, slightly below the estimated Rs 1,383 crore.

Dependence on cancer drug worries analysts

CLSA believes the strong dependence on Revlimid, which will go off-patent in January 2026, will keep Dr Reddy’s overall revenue growth tepid over the medium term.

The company’s base US business saw price erosion, while the India market registered a decline in volumes due to lower chronic mix, CLSA added. CLSA believes the company’s lower chronic mix will keep its revenue growth in the India business tepid over the medium-term.

On that account, the firm downgraded the stock to ‘underperform’ from the previous ‘buy’ call but raised its price target to Rs 6,060 to factor in the strong Q3 earnings.

Brokerage firm Nuvama Institutional Equities also remains cautious on Dr Reddy’s, given the high concentration risk of Revlimid and base business molecules, slowdown in US launches and filings along with uncertainty around pipeline monetisation and subpar India performance which is yet to deliver on its innovative pipeline. Hence, the firm retained its ‘reduce’ call on the stock but raised its price target by 7.5 percent to Rs 5,020.

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Domestic sales fail to impress

Brokerage house Motilal Oswal Financial Services highlighted the on-year moderation in Dr Reddy’s India sales, which has been continuing for three quarters now. While the firm raised its earnings estimates for DRL by 4-7 percent for FY24-26 to price in market share expansion in key products, new drugs, and better operating leverage, it still expects a modest 3 percent earnings CAGR over the period.

“Further, the product-specific concentration of earnings remains elevated for Dr Reddy’s,” the brokerage stated while retaining its ‘neutral’ call on the stock. MOFSL assigned a price target of Rs 5,540 for Dr Reddy’s.

Brokerage firm Citi highlighted the sharp margin expansion for Dr Reddy’s in its Pharmaceutical Services and Active Ingredients (PSAI) segment due to an increase in licensing income which lifted the company’s EBITDA margin to 28 percent in Q3, higher than the expected 24 percent. However, the firm also cautioned that this expansion in the PSAI segment implies that margins in the company’s core business might be trending lower.

Accordingly, keeping a cautious stance, Citi also retained its ‘sell’ call on the stock, with a price target of Rs 5,290.

On January 30, shares of Dr Reddy’s settled flat at Rs 5,840.95 on the NSE.

Also Read | Dr Reddy’s Q3 results: Net profit up 11% to Rs 1,379 crore, marginally misses estimates 

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