US market drag keeps Dr Reddy's, Cipla under pressure despite strong product pipeline

ET Intelligence Group: Initial trends in pharma results for the June quarter show pressure on the US business, with a double-digit fall in net profit and contraction in operating profitability. The domestic business continued to be a bright spot for both companies. Obesity therapies, respiratory products, biosimilars and speciality launches are key growth drivers in the coming quarters.

Dr Reddy's Labs lost 10% and Cipla 8%, on bourses, underperforming the 10% gain in the BSE Healthcare index over the past 12 months. These stocks are expected to remain range-bound in the short term given the challenging business scenario. Analysts have reduced earnings forecasts for each company by 6-8% for FY27 and FY28.

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Dr Reddy's reported a weaker-than-expected quarter as profitability was hit by a sharp decline in lenalidomide sales and a one-time ₹239.7-crore provision linked to quality issues in its semaglutide portfolio. Its revenue declined 5.6% year-on-year to ₹8,070.5 crore, while net profit dropped 69.2% to ₹434.8 crore.

In comparison, Cipla reported its highest-ever June quarter revenue of ₹7,119.3 crore, up 2% year-on-year, but profit declined 39.2% to ₹785.6 crore as margins came under pressure from product mix changes, launch-related investments, inventory charges and geopolitical disruptions.

Operating margin before depreciation and amortisation (Ebitda margin) for Dr Reddy's dropped to 12.5% from 26.7% in the year-ago quarter and contracted to 16.7% from 25.6% for Cipla during the period, highlighting the profitability challenges both companies currently face.

The US business remains the key transition area for both companies. Dr Reddy's North America revenue declined 35% year-on-year as lenalidomide sales continued to normalise; however, the company maintained that its core non-lenalidomide business should deliver double-digit growth in FY27. Cipla's North America revenue dropped 21% to ₹1,532 crore.

Both the companies, however, remain optimistic about their US prospects. Dr Reddy's launched six products during the quarter, including first-to-market generic bosutinib, used in cancer treatment, with 180-day exclusivity, while Cipla commercialised Nintedanib (used to treat lung infections), Dapagliflozin (used in diabetes treatment), and generic Ventolin (used to treat respiratory ailments).

Obesity and peptide-based therapies are emerging as future growth drivers. Dr Reddy's has launched generic semaglutide injection in Canada and semaglutide tablets in India, while also introducing a GLP-1 nutrition product with Nestle. Although quality issues temporarily disrupted semaglutide supplies, the company expects production to resume by November.

Cipla has gained early traction in obesity management through Yurpeak (tirzepatide), licensed from Eli Lilly. The brand generated around ₹80 crore in sales during the quarter and has already become the second-largest brand in the segment after Mounjaro.

Emkay Research has reduced earnings estimates for each of the two companies by 6-8% for FY27-28. The broker has downgraded Dr Reddy's' target price by 8% to ₹1,200 while maintaining a 'reduce' rating on the stock. On the other hand, it has retained an 'add' rating on Cipla, citing strong momentum in domestic sales and has retained the target price for Cipla at ₹1,450.