Why does Dr Reddys labs commands much lower valuations than other pharma companies?

Dr Reddys Labs' ( DRL) December quarter performance was impacted by high base year effect on account of benefit of exclusively launching generic olanzapine last fiscal year.

The Hyderabad-based drug company has witnessed volatility in its performance on account of variety of reasons like periodical drug exclusivities and restructuring expenses related to Betapharm, its German subsidiary.

DRL's performance represents that of a typical generic pharma company whose fortunes significantly depend on the opportunities to launch low-cost copies of drugs going off patent over the next couple of years.

The results of such companies show volatility quarter after quarter depending on the drug launches made during that quarter. Such companies naturally get lesser valuations than those, which log a more consistent performance in each quarter.

It is not that other Indian generic pharma companies do not show volatility in their performance, but DRL's peers like Sun Pharma and Lupin have managed to log a fairly consistent high-level performance. These therefore manage to get richer valuation than companies like DRL and Ranbaxy. So, while DRL trades at a price to earnings (PE) multiple of 21.3, Sun Pharma trades at 28.9, Lupin at 24.7 and GSK Pharma at 30.8.

With DRL having more drug launches in its pipeline under the first-to-file opportunities, the volatility is here to stay.