Dr. Reddy's, after reporting solid growth over the past year, has registered a decline in turnover. The drop in sales is primarily due to slowdown in fluoxetine sales, which has reflected across the income statement. The company has continued to show good growth in active pharma ingredients (API) business and branded formulations.
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In our earlier reports, we had indicated that sales from fluoxetine business are expected to decline. Adjusting for the same, sales in the half-year period have increased by 22% YoY. The API business is likely to have continued to performed well on the back of Tizanidine and Doxazosin. API exports are expected to catapult in the future considering the fact that the company has filed 3 DMF's (Drug Master Filings) in 4QFY02 and is likely to have made more filings last quarter.
In branded formulations, the company reported a overall 14% growth including both domestic and international business. The growth in the domestic market could have been facilitated by dental products. It may be recalled that the company acquired 6 dental brands in India from a local Indian company (Groupe Pharma) last year, which has added to domestic formulations sales in the current year.
As mentioned earlier, financials are reflecting the effect of decline in fluoxetine sales. Marketing exclusivity for fluoxetine expired in January '02 leading to sharp price erosion (almost 80%), as two other competitors have entered the market. That said, with revenues from new businesses supporting organisational expansion and increased R&D expense, a similar buffer has not been present in quarter ended September '02 leading to drop in margins. R&D expense for the quarter has almost doubled from 4.5% to 8.6% of net sales.
At Rs 726, the scrip is trading on a multiple of 15.5x 1HFY03 annualised stand-alone earnings, as compared to 20.2x 1QFY03 annualised stand-alone earnings. It may be recalled that the company received a major setback in 2Q with suspension of clinical trials for the outlicensed anti-diabetic molecule (Ragaglitazar). Also, there were concerns that the company delayed disclosing the Ragaglitazar setback. We had mentioned that moving towards a research oriented business model could lead to lumpiness in earnings before a steady drug pipeline is built.
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