Dr. Reddy’s Laboratories targets growth through semaglutide and biosimilar launches despite US weakness

Investment View and Valuation

ICICI Direct Research maintains a BUY rating on Dr. Reddy's Laboratories with a target price of Rs 1,340, compared with the CMP of Rs 1,130. The broker views the weak Q1FY27 performance as a quarterly disruption rather than a change to the company's longer-term opportunity.

The target price is based on 22 times FY28E adjusted EPS of Rs 60.7. ICICI Direct expects growth from niche launches, in-licensing, GLP-1 products, biosimilars and innovative products across more than 90 countries.

Branded generics account for around 42 per cent of revenue. Management's focus on complex-product launches is considered important to reaching its aspirational EBITDA margin and RoCE of around 25 per cent.

Q1FY27 Financial Performance

Dr. Reddy's Laboratories reported Q1FY27 revenue of Rs 8,099.8 crore, down 5.5 per cent year-on-year but up 7.3 per cent sequentially. The decline was primarily driven by a 35 per cent year-on-year fall in US revenue to Rs 2,205 crore, due mainly to lower gRevlimid sales.

Reported Q1FY27 EBITDA fell 60.4 per cent year-on-year to Rs 861.4 crore, while EBITDA margin declined 1,472 basis points to 10.6 per cent. Gross margin fell 904 basis points to 58.2 per cent. The company booked approximately Rs 239 crore of impairments and provisions related to semaglutide impurities; excluding these one-off items, EBITDA margin was about 14 per cent.

ICICI Direct describes the margin pressure from higher freight and logistics costs in the Middle East as transient. The company launched 43 products across geographies during the quarter.

Growth Drivers and Management Outlook

Management guided for double-digit growth in the US base business in FY27 after adjusting for prior-year gRevlimid sales. Dr. Reddy's launched bosutinib tablets in the US during Q1FY27 with 180 days of exclusivity.

Contract manufacturing organisations supply around 25-30 per cent of US sales. Management does not immediately plan to move manufacturing to the US in response to generic-drug tariff developments.

• India organic growth was 15.5 per cent, excluding a material semaglutide contribution.
• Russia growth reflected price increases, new launches and currency benefits.
• Rest of World growth was supported by volumes, launches and currency.
• Potential growth areas include niche launches, in-licensing, GLP-1 products, biosimilars and innovative products.

Semaglutide and Biosimilar Pipeline

Management expects semaglutide supplies to resume in H2FY27, targeting November 2026, and may seek production-linked incentive support for semaglutide sales. ICICI Direct expects sales of 6-7 million semaglutide pens between November 2026 and March 2027, lower than its earlier expectation of 10-11 million. Approximately 1,80,000 pens were sold in Canada and India in Q1FY27.

Semaglutide and abatacept are expected to be margin accretive because much of the peptide and biosimilar cost base is already in place. Abatacept is planned to be manufactured at the Bachupally biologics plant, with a December 2026 goal date. Subcutaneous abatacept is expected to be launched in the US by FY28-end and in Europe in H2FY29.

Margin and Financial Forecasts

Management guides for approximately 20 per cent FY27 EBITDA margin, supported by the branded business. It also expects an effective tax rate of 24-25 per cent and R&D spending of 7-8 per cent of sales.

Key Risks

• A slower ramp-up in new launches, particularly in the US.
• A rising intangible component of the balance sheet from licensing deals.