Dr Reddy’s Laboratories sees more rough winds post Betapharm hit

Dr Reddy’s Laboratories (DRL) is facing double headwinds - one in the US, and the other in Germany, by the company’s own admission.

On Wednesday, it revealed a net loss of Rs 521.7 crore for the
third quarter ended December 2009, primarily due to impairment charges at German subsidiary Betapharm.

Revenues stood at Rs 1,729.6 crore.

In September last year, the New York Stock Exchange-listed company had to withdraw one lot each of its four generic drugs — citalopram, fexofenadine, risperidone and pravastatin.

Following this, it had to suspend some shipments and recheck quality across products.

Subsequently, the US Food and Drugs Administration (FDA) carried out inspections at two of its facilities and made some observations.

The company has worked on the observations and filed documents for approval of the facilities. The cumulative effect of all this has impacted supplies and Dr Reddy’s customers have hedged their bets by buying elsewhere.

And normalcy is unlikely to return fast. “It is going to take more than a couple of quarters. There is not going to be any quick-fix solution to the issue,” vice-chairman and CEO GV Prasad said late on Wednesday.

Overall sales in the US dropped by about 55% year on year, from Rs 665 crore to Rs 297 crore in the third quarter.

But the primary reason for this was that in the previous year’s December quarter, Rs 357 crore came in because the company enjoyed 180-day exclusivity on migraine drug Sumatriptan.

Reddy’s sees more rough winds post Betapharm hit There are no such upsides in the near future.

The company also continues heavy headwinds in Germany.
In euro terms, revenues at Betapharm, its subsidiary there, dropped by about 4%, but in rupee terms there was minuscule improvement - up 2% from Rs 200 crore to Rs 204 crore.

But new contracts such as with insurer Allgemeine Ortskrankenkasse (AOK), that the company had won continue to put pressure on pricing and business.

Dr Reddy’s has also bagged orders from other health insurers such as TK, Spectrum, IKK and GWQ. But it has also lost some deals due to supply issues.

“While we were competitive enough in bidding for products manufactured out of India, for those that are being made in Germany we did not bid due to high competitive pressure,” COO Satish Reddy said.

Dr Reddy’s wrote down Rs 345.6 crore intangible assets and Rs 514.7 crore goodwill in the December quarter, leading to a loss in the December quarter.

“In March last year, we said the total impairment would be about 200 million euros. After providing for about 109 million euros, the carrying value now is about 90 million. We hope that the market will stabilise now. If there is any major change in the German market again impacting the valuation, we will continue to have the impairment. The company has no discretion in charging impairment and it has to be done according to the IFRS (International Financial Reporting Standards) norms,” CFO Umang Vohra said.

To a pointed question from DNA on whether the company regretted acquiring Betapharm, he said, “On hindsight, if the clock is turned back, I would not acquire the company.”

Considering the continued troubles in the US and German markets, the company has reduced its annual guidance significantly.

In the beginning of this fiscal, Dr Reddy’s had guided overall sales growth of about 10% for the full year, but now it has revised the guidance to “low single digits”.

But there is some good news, too.

The Russian market is looking up and the Indian market has contributed 34% to the growth in revenue.

The marketing deal announced with GlaxoSmithkline is also at an advanced stage.

Both companies have identified some products to launch in Mexico shortly.

The launch of omeprazole magnesium in the US over the counter market is likely to give some significant opportunities to the company in the coming quarters.

The company is working on launching a biosimilar product in India shortly. The pipeline in the US is looking strong with 62 abbreviated new drug applications including 35 Para IVs and rest on first to file basis.