Dr. Reddy's Laboratories Limited (RDY) Earnings

Management highlights

### Strategic Execution - Executed the 2-pronged strategy of strengthening the core base business while investing in future growth drivers including peptides, biosimilars, consumer health, and innovation - Underwent organizational restructuring with dedicated leadership for each growth pillar (global generics, biologics, consumer health, innovation) to enable sharper focus and more effective execution - Completed operational integration of the acquired nicotine replacement therapy (NRT) consumer healthcare business - Pursues value-accretive inorganic opportunities aligned with long-term growth goals ### Pipeline and Regulatory Progress - Secured first-to-market regulatory approval for semaglutide injection (type 2 diabetes) in Canada; already holds first-to-market approval in India, where the branded version Obeda launched immediately upon patent expiry - Oral semaglutide approved by India's CDSCO; continues to address regulatory concerns with ANVISA in Brazil for generic semaglutide - U.S. FDA accepted for review the BLA for the intravenous (IV) formulation of the abatacept biosimilar candidate; subcutaneous formulation submission planned for later - Acquired Progynova and Cyclo-Progynova in India to expand the hormone replacement therapy franchise; partner product COYA 302 received fast track review status - U.S. FDA assigned VAI classification to the Srikakulam, Andhra Pradesh formulation facility following a December 2025 GMP inspection - Denosumab biosimilar is awaiting U.S. approval (partner Alvotech is addressing a deficiency letter) and on track for launch in Europe ### Portfolio Prioritization - Discontinued CAR-T therapy R&D programs and impaired the related INR 135 crores investment as part of portfolio prioritization - Partner Immutep discontinued a trial for in-licensed asset Eftilagimod Alpha following an interim futility analysis, leading to a INR 93 crores impairment - Divested non-core brands in the India business, generating net other operating income of INR 189 crores in Q4 ### ESG and Recognition - Awarded EcoVadis gold medal with a score of 80, placing Dr. Reddy's among the top 5% of global assessed companies - Ranked first in the Indian healthcare and pharmaceutical industry among India's Top 5 sustainable companies; recognized for the third consecutive year in the leadership category of the 2025 Indian Corporate Governance Card

Guidance

- Overall gross margins are expected to be above 50% in FY '27, up from 48% adjusted gross margin in Q4 FY '26, driven by product mix improvements from new launches including semaglutide and ongoing cost reduction programs - Nominal SG&A spend in FY '27 is expected to stay at approximately the same level as FY '26, meaning it will decline as a percentage of revenue amid double-digit top-line growth - Adjusted R&D spend as a percentage of revenue is expected to be between 7% and 8% in FY '27 - The effective tax rate (ETR) for FY '27 is forecast to be between 24% and 25% - Management expects the underlying base business (excluding lenalidomide) to sustain double-digit growth momentum, with North America ex lenalidomide also expected to deliver double-digit growth in FY '27 - Semaglutide unit sales are targeted to reach ~12 million units in FY '27, with a 3-4 month approval delay in Brazil pushing some volumes into early FY '28; 6-7 million units are expected to be sold by the end of calendar 2026 across approved markets, with capacity to reach over 40 million units annually by FY '28 - Abatacept IV biosimilar is targeted for launch in early calendar 2027 (FY '27 for Dr. Reddy's, pending FDA approval) - Biosimilar business is expected to reach breakeven after abatacept launch (around FY '28), with annual sales forecast to reach $500 million to $700 million by FY '29 - Annual CapEx for FY '27 is projected to be around INR 2,000 crores, split between biosimilar-specific investments and general capital expenditure - Adjusted EBITDA margin is expected to approach the 25% aspirational target in FY '27, with semaglutide contribution helping move closer to this goal

Segment performance

1. North America Generics: Reported Q4 revenue of $199 million ($251 million excluding one-time shelf stock adjustment for lenalidomide), a 40% year-over-year decline; full year FY '26 revenue of $1.3 billion ($1.36 billion adjusted), a 21% year-over-year decline. Revenue contribution: ~30% of total adjusted full year revenue. The decline is entirely attributable to lower lenalidomide sales ahead of patent expiry. 2. Emerging Markets (excluding India): Q4 revenue of INR 1,806 crores, 29% year-over-year growth; full year revenue of INR 6,761 crores, 23% year-over-year growth. Revenue contribution: ~20% of total adjusted full year revenue. Growth was driven by new product launches, higher volume, and favorable currency movements. 3. India Business: Q4 revenue of INR 1,566 crores, 20% year-over-year growth; full year revenue of INR 6,219 crores, 16% year-over-year growth. Revenue contribution: ~18% of total adjusted full year revenue. Outperformed the broader Indian pharmaceutical market, driven by innovation franchise growth, new brand launches, price increases, and volume growth. 4. Europe (including acquired NRT Consumer Healthcare): Q4 revenue of $136 million, 3% year-over-year decline; full year revenue of $542 million, 37% acquisition-led year-over-year growth. Revenue contribution: ~15% of total adjusted full year revenue. Q4 decline stemmed from generic price erosion. 5. PSAI (Pharmaceutical Services and Active Ingredients): Q4 revenue of $101 million, 10% year-over-year decline; 10% sequential growth. Revenue contribution: ~3% of total adjusted full year revenue. Q4 decline was due to lower API volume uptake. Gross margin for PSAI was 19.9% in Q4 and 17.2% for the full year. Consolidated adjusted full year FY '26 revenue: $3.63 billion, 4.6% year-over-year growth. Excluding lenalidomide, the base business delivered double-digit full year growth.

Risks & headwinds

- Significant product-specific headwinds from the patent cliff of the former top product lenalidomide, including a large one-time INR 453 crores shelf stock adjustment that reduced Q4 FY '26 revenue - Ongoing price erosion in the unbranded generics segment across geographies, which puts pressure on gross margins - Regulatory delays in key markets (such as semaglutide approval in Brazil) can push expected revenue and volume projections into future periods - Biosimilar development and approval is dependent on partner progress; any delays or deficiencies in partner submissions (such as the denosumab deficiency letter to partner Alvotech) can delay launch and revenue recognition - Intensifying generic competition for newly launched products like semaglutide could lead to faster-than-expected price declines below the expected $25 per unit floor price - Uncertainty around future biosimilar demand and competitive dynamics makes long-term sales forecasting imprecise - Potential contingent liabilities including an outstanding potential VAT liability in one subsidiary, for which an additional INR 114 crores provision was recorded in Q4 FY '26

Analyst Q&A

• Q: Why was the lenalidomide shelf stock adjustment (SSA) so large, given the patent expiry was well anticipated?

  A: Management stated they were also surprised by the size of the adjustment. It was not part of any prearranged agreement with customers, and stemmed from unanticipated planning errors on the customers' end. /

• Q: What is the competitive landscape and expected pricing for generic semaglutide, and what is the unit sales outlook for FY '27?

  A: Management expects only two generic players plus the innovator to be in the market for the first several months. List prices will be roughly half the innovator's price, with a net price floor of ~$25-$30 per unit (higher in some markets). The full 12 million unit FY '27 target remains, but regulatory delays in Brazil push a small portion of volumes into early FY '28, with 6-7 million units expected by the end of calendar 2026. /

• Q: Why was Q4 FY '26 adjusted gross margin only 48% despite the lenalidomide adjustment, and will margins return to 50%+ in future quarters?

  A: The lower Q4 margin was driven by temporary product mix impacts. Management reaffirmed that the long-term gross margin range is 50%-55%, and margins will return to above 50% in FY '27 driven by product mix improvements from new launches (including semaglutide) and ongoing product cost reduction programs. /

• Q: Why is R&D spend declining, and how will semaglutide dosage forms roll out across emerging markets?

  A: R&D spend is lower because the large Phase III investment for abatacept is complete; future biosimilar programs will mostly be partnered, sharing R&D costs, and internal R&D productivity is improving with tools like AI. Oral semaglutide will launch beyond India across other emerging markets, and is expected to gain more traction in lower-income emerging markets relative to injectable pens due to more favorable pricing points.