Morningstar | Dr. Reddy's Fiscal 2Q Performance Provides No Major Surprises
Dr. Reddy's fiscal second-quarter results provided no major surprises to us. We don't anticipate making major changes to our fair value estimate, and we’re also reiterating our no-moat rating.The company's global generic revenue was mixed across regions during the quarter. The segment's overall revenue grew by roughly 7% thanks to emerging-market performance, and we think Dr. Reddy's relative brand recognition in emerging markets will continue to bode well for its performance. The company experienced 65% generic drug revenue growth in its rest of world category, thanks to new market launches and better volume in existing regions. Meanwhile, the relatively flat North American generic performance (regional revenue was down by 0.4%) was mostly due to competitive pricing pressure, and we continue to anticipate price erosion to persist in the region. The company's overall gross margin increased by 170 basis points compared with the year-ago period, primarily due to new product launches, improved product mix, and relatively favorable foreign exchange effects.
The company provided a brief regulatory update in its quarterly filings. Dr. Reddy's API plant in Srikakulam is in the process of responding to additional U.S. Food and Drug Administration questions, while its oncology manufacturing facility in Duvvada is currently under reinspection. While we are encouraged to see the company make progress on these items, we still think the remediation of these facilities is long overdue. Separately, the company recently entered into several divestitures, including its antibiotic manufacturing assets in Tennessee and its API manufacturing business unit in Jeedimetla, Hyderabad. We aren't entirely surprised to see the sale of these assets given the company's previously discussed regulatory issues, along with the ongoing competitive pressures in North America. In general, we expect these divestments will aid the company's efforts to optimize costs and manufacturing activities.
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