Stock Review: DR REDDY’S LABS

A GOOD show in the third quarter aside, a district court ruling in the US has now come as a shot in the arm for Dr Reddy's Labs, or DRL. The ruling allows the company to sell the generic version of Allegra, a leading drug of Sanofi Aventis, France's biggest drug maker. According to Bloomberg data, Allegra in all forms accounted for about $619 million (. 2,785 crore) of Sanofi's revenue for the first nine months of 2010. DRL was earlier barred from selling the generic version of the drug in the US. The court has told Sanofi to pay an indemnity of $40 million or . 180 crore, which DRL will be able to net if it wins the case in appeal too. This development is quite positive for the company, which is recovering from a history of poor performance. The patent of the drug expires in 2014, which leaves DRL with two years to make the most of the sale of its generic version. While a part of the fourth quarter will include the sales of this generic, the full impact will be reflected in the company's performance in FY12.

   DRL is expected to earn . 150-180 crore in revenues next fiscal from the launch of this generic.

   The company's performance for the third quarter ended December 2010 was in line with market expectations. However, higher selling and general expenses and research & development expenses impacted its operating profit.

   One-time litigation costs incurred by the company and higher expenses incurred on over-the-counter drugs and expansion of field force led to a rise in expenses.

   Revenues from the US business proved to be the major growth driver. Due to the underperformance of Betapharm (the company's German subsidiary), DRL's European business registered an 18% decline in profits. At 12%, the company's growth in the domestic market was way below the average industry growth rate of 20%.

   DRL's future growth appears more promising in terms of its business in the US and India and supply of the active pharma ingredients (APIs).

   The market was disappointed with the company's financial performance for the December quarter. The stock had lost close to 4% following the results last Tuesday. However, it has now gained lost ground after the favourable court ruling.