Dr. Reddy's Laboratories Ltd. Q2 FY2027 earnings call

• Strategic Priorities: Management reaffirmed commitment to delivering double-digit growth across geographies and sustainable profitability through execution in core businesses, progress on key assets, productivity improvements, and disciplined investment in organic/inorganic growth drivers.
• Semaglutide Resumption: Confirmed that API supply issues are resolved, with necessary API shipped to partners. Validation is pending but expected to be successful by November 2026. Launches in Canada, Latin America, and Africa are planned.
• New Product Approvals & Launches:
  • Partnered with Takeda for India’s first approved dengue vaccine (Q-Denga) in H1 2027.
  • Expanded collaboration with Gilead for Lenacapavir for HIV prevention.
  • Received USFDA approval for Rituximab Biosimilar (commercialized via Fresenius Kabi).
  • Launched Nivolumab in India (biosimilar immuno-oncology).
  • Simaglutide approved in 10 countries; aiming for 89 markets.
• Operational Efficiency: Gross margin improved to 52.1% (up 562 bps sequentially), driven by favorable business mix (higher profitability in India/EM/NRT) and new product contributions. SG&A spend decreased to 32% of revenue.
• Sustainability Recognition: Achieved CRI SIL ESG score of 73/100, moving into the leadership category. Won Finance Asia Awards for best large-cap company.
• R&D Focus: R&D spending decreased to 6% of revenue (Rs 524 crores). Management expects R&D spend to normalize to 7-8% in coming quarters.

Consolidated revenues were Rs 8,671 crores (USD 905 million), a decline of 1.5% year-over-year (YoY) but a growth of 7.4% sequentially. The underlying base business (excluding Semaglutide in North America) delivered double-digit growth.

• North America Generics: Revenue was $264 million, accounting for 29% of total revenue. This represents a 29% YoY decline and 12% sequential growth, primarily due to lower Semaglutide sales. Underlying base business grew double-digits driven by new product launches.
• Branded Franchise (India, Emerging Markets, Consumer Health/NRT): Accounted for 53% of overall revenue, providing stable margins.
• Emerging Markets: Revenue was Rs 2,059 crores, accounting for 24% of total revenue. It showed robust 34% YoY growth and 12% sequential growth, driven by new product launches and favorable currency movements.
• India Business: Revenue was Rs 1,851 crores, accounting for 21% of total revenue. It delivered strong 17% YoY growth and 8% sequential growth, supported by recent launches and price increases.
• Europe Business: Revenue was €127 million, accounting for 16% of total revenue. It declined 6% YoY and 3% sequentially due to generic price erosion and post-NRT integration operating model changes.
• PSA/CDMO Business: Revenue was $88 million, accounting for 10% of total revenue. It declined 19% YoY and 3% sequentially, primarily due to lower API volume uptake. However, the CDMO segment generated over $100 million in revenue in the last 12 months.

• Gross Margin: Maintained guidance for gross margin in the range of 52-55%. Management confirmed that current levels represent the bottom, with expectations for further improvement in subsequent quarters.
• EBITDA Margin: Targeting an EBITDA margin of 25% long-term. Current quarter achieved 20.6%, with management expressing confidence in reaching higher margins as Semaglutide resumes and cost controls persist.
• Semaglutide Volume: Adhering to previous guidance of 6-7 million devices for the current fiscal year. Long-term run rate estimate remains at 12-15 million units, contingent on market success.
• R&D Spend: Expects R&D expenditure to increase to 7-8% of revenue in future quarters from the current 6%.
• CAPEX: Full-year CAPEX expected to be between Rs 1,600-1,700 crores, slightly below the previously guided ~Rs 1,800 crores.
• US Business Trajectory: Optimistic about sustaining growth in the second half, supported by Abatacept, Semaglutide, and complex generics, despite potential dips from specific SKUs like Botocinep.

• Geopolitical & Supply Chain Disruptions: Elevated freight costs and logistics challenges due to the Middle East crisis have impacted expenses. Potential additional drag from raw material price increases (KSMs, solvents) linked to geopolitical tensions.
• Regulatory Delays: Risk of Clinical Hold Letters (CRL) or delays in FDA approvals for key products like Abatacept and Semaglutide validation, although management remains confident.
• API Scale-up Issues: Past disruptions in Semaglutide API supply caused significant revenue declines; while resolved, dependency on partner validation timelines poses operational risk.
• Price Erosion: Continued generic price erosion in Europe and competitive pressures in the US biosimilar market may limit market share gains.
• Foreign Exchange Volatility: Adverse forex movements affected tax rates and financial income, highlighting exposure to currency fluctuations.

Q: What is the status of Semaglutide resumption and confidence in meeting volume guidance? / A: CEO stated that API scale-up issues are resolved and API has been shipped to partners. Validation is pending but expected to succeed by November 2026. He expressed high confidence in meeting the 6-7 million device guidance for the year, noting that most volumes will go to Canada and Latin America. The regulatory process for other markets continues unaffected by the API issue.

Q: What drove the sequential gross margin improvement to 52.1%? / A: CFO explained that the improvement is driven by a favorable business mix, as higher-margin segments like India, Emerging Markets, and NRT contributed more significantly. Additionally, new product launches in the US added profitability. Management confirmed this trend should continue, maintaining guidance for 52-55% gross margin.

Q: How is the NRT business performing post-business model change with Helion? / A: CEO clarified that the shift from a margin-sharing model with Helion to direct sales/distribution resulted in lower top-line sales but significantly higher profitability. While YoY comparisons remain challenging for two more quarters, the underlying business is growing well, and profitability exceeds initial business model expectations.

Q: What are the market share expectations for Abatacept in the US? / A: CEO estimated a fair market share of 15-25% for the IV formulation, depending on launch success. He noted that competition is limited initially (only innovator vs. Dr. Reddy's), reducing price sensitivity compared to pharmacy benefit drugs. Subcutaneous formulation is expected in Feb 2028, which could further boost share.

Q: When can we expect Semaglutide launches in Brazil and Turkey? / A: CEO indicated that Brazil likely sees launch in early Q4, while other smaller markets will launch late Q3 or early Q4. Timelines depend on completing validation and shipping batches. He reiterated the long-term run rate estimate of 12-15 million units, though this remains tentative until market dynamics are clearer.