Dr. Reddy’s Laboratories Ltd aims to foray into areas such as disease management, nutraceuticals, biologics and cell and gene therapy as part of its Horizon 2 strategy, it said at its Investor Day on Tuesday. This is encouraging, but it will also mean an increase in research and development expenses, which are expected to grow 10-11% as a percentage of revenue from the roughly 8% seen in FY22. Note that investments in Horizon 2 assets are only expected to make a meaningful contribution to revenue through 2027.
Dr Reddy’s Horizon 2 strategy is aimed at supporting the company’s long-term sustainable growth, while the Horizon 1 strategy is important from a near-to-medium term perspective as it focuses on growing its core segments, including generics, biosimilars, active Pharmaceuticals included. ingredients, branded generics and over-the-counter products.
However, analysts aren’t particularly thrilled with the near-term outlook. For one, growth in US trade, except for gRevlimid, is cause for concern. In FY23, the company plans to launch 20-25 products in the US market.
“The road ahead for Dr. Reddy’s may not be easy as it enters a period of accelerated investment on top of pricing pressure and cost escalation. 25 in the US,” analysts at Edelweiss Securities said in a report on June 21. The annual launch may help offset continued price declines in the US, but growing on a higher basis remains a challenge. India’s revenue grew at a CAGR of 17% over FY19-22 to approx. 4,200 crores.
Emerging market business grew at a CAGR of around 16% in FY 19-22 and plans to grow this business. In China, the company is eyeing 2-3x revenue growth over the next five years. The Europe business, which accounted for 8% of fiscal 2012 revenue, is expected to contribute more slowly on the back of expansion into new countries.
On Investor Day, Dr Reddy’s reiterated his guidance of 25% EBITDA margin and 25% return on capital employed in the medium term. It aspires to achieve double-digit sales growth in the same period.
Analysts at Motilal Oswal Financial Services expect Dr Reddy’s to deliver 15% earnings CAGR in FY 2012-24, led by 17%, 17% and 13% sales CAGR in North America, Europe and PSAI segments respectively. PSAI refers to pharmaceutical services and active ingredients.
Execution of growth plans will remain a key watchdog for the stock, which has declined nearly 20% over the past year.