Dr. Reddy’s Laboratories Q3 Earnings Call Highlights

Dr. Reddy’s Laboratories (NYSE:RDY) reported a “resilient performance” in its fiscal third quarter of FY26, with revenue growth and steady profitability despite what management described as product-specific headwinds, led by lower lenalidomide sales and continued pricing pressure in U.S. and European generics.

On the company’s earnings call, Chief Financial Officer M.V. Narasimham (MVN) said consolidated revenue rose 4.4% year over year to ₹8,727 crore ($971 million), though it declined 0.9% sequentially. Management attributed the quarter’s performance to double-digit growth in base businesses excluding lenalidomide, as well as favorable foreign exchange movements, partially offset by weaker lenalidomide contributions and generic price erosion.

Quarterly profitability impacted by one-time labor code provision

MVN said reported EBITDA margin was 23.5%, which included a one-time provision tied to changes in employee benefit obligations under new labor codes in India. Excluding that provision, EBITDA margin was 24.8%.

Gross margin fell to 53.6%, down 505 basis points year over year and 104 basis points sequentially. MVN cited several drivers behind the compression, including lower lenalidomide sales, price erosion in unbranded generics, adverse product mix in the PSA segment, and the labor-code provision. Adjusted for the one-off, gross margin was 54.1%. Reported gross margin was 57.4% for global generics and 17.3% for PSA.

SG&A increased 12% year over year to ₹2,692 crore ($300 million), accounting for about 31% of revenue. MVN said the increase reflected targeted investments to support branded franchises, including the acquired nicotine replacement therapy (NRT) consumer healthcare business and branded generics, along with foreign exchange effects and the labor-code provision. Excluding the one-time cost, SG&A was about 30% of revenue.

R&D spend was ₹615 crore ($68 million), down 8% year over year and largely flat sequentially, which MVN attributed to lower biosimilar development spend as “a large part of investment related to Abatacept has been completed.” R&D was 7% of revenue (6.8% excluding the one-off).

Profit after tax attributable to equity holders was ₹1,210 crore ($135 million), down 14% year over year and 16% sequentially, with diluted EPS of ₹14.52. The company ended the quarter with a net cash surplus of ₹3,069 crore ($342 million) and reported free cash flow of ₹374 crore ($42 million).

Strategy: base business growth, efficiency, and pipeline progress

Chief Executive Officer Erez Israeli said performance remained consistent with Dr. Reddy’s strategic priorities: growing the base business, driving efficiencies, advancing key pipeline programs (including “Magnota and Abatacept”), and pursuing selective business development.

Israeli highlighted a strategic collaboration with Immutep for commercialization of the immunotherapy oncology drug eftilagimod alpha in “a key global market outside of North America, Europe, and Japan, and Greater China.” He said the deal includes a $20 million upfront payment, potential milestones of up to $350 million, and royalties.

Israeli also said the company launched a “novel recombinant vaccine for the prevention of hepatitis E virus infection” in India. Additionally, he said the integration of the acquired NRT business is progressing as planned, with 85% of the business by value now under operational controls and integration expected to be largely completed by the end of the fiscal year.

Semaglutide plans: India launch set; Canada timing depends on regulatory response

On semaglutide, Israeli said Dr. Reddy’s received marketing authorization for semaglutide injection in India from the DCGI, secured necessary local manufacturing licenses, and began filing in emerging markets via the COPP route.

Israeli also discussed a Health Canada “notice of non-compliance” received in October 2025 regarding semaglutide injection. He said the company responded by mid-November and is awaiting a regulatory response. In Q&A, management said Canada has a goal date in May (six months from the response), but an approval could come anytime before then. Israeli said the company is preparing for a potential Canadian launch in Q4, with an alternative scenario of Q1, and suggested a launch could occur “anytime between end of February to May.” He added that no Health Canada plant inspection is expected for the submission.

For India, Israeli said the company plans to launch on March 21, describing the initial launch as the generic version of Ozempic (diabetes indication). He said additional products and strengths are expected later, and that the equivalent of Wegovy (weight management) would follow after regulatory approvals.

In Q&A, management discussed pricing expectations for semaglutide across markets, indicating the previously discussed $20–$70 range still applies, while noting most markets are expected to be “on the lower end of the spectrum” and that competition could compress pricing over time.

Biosimilars and regulatory updates: approvals in Europe; U.S. actions ongoing

Israeli said the company completed the BLA filing for the IV presentation of an abatacept biosimilar candidate in December 2025. He also said Dr. Reddy’s received European Commission approval for its ustekinumab biosimilar in Q3 FY26, along with approval from the U.K.’s MHRA, and launched the product in Germany in December with additional European launches in preparation.

However, Israeli said the company received a complete response letter (CRL) from the U.S. FDA for the ustekinumab biosimilar BLA developed by partner Alvotech, citing observations from a pre-license inspection at Alvotech’s Reykjavik facility.

On manufacturing compliance, Israeli said a U.S. FDA GMP inspection of the company’s CTO SEZ API facility in Srikakulam concluded with zero observations. He also said the U.S. FDA issued a Form 483 with five observations following a GMP and pre-approval inspection at the company’s FTO ACZ PE1 facility in Srikakulam; management said it responded within the required timeframe. Israeli added that the company received a post-application action letter related to observations from a September 2025 inspection at the Bachupally biologics facility for rituximab biosimilars and is working to resolve them.

Management also provided timelines and expectations during Q&A:

• Denosumab (U.S.): Management said Alvotech must respond to a deficiency letter and that approval timing is uncertain, with Israeli indicating it is “likely” in the second quarter of FY27 or later.
• Rituximab (U.S.): Israeli said the company expects to respond within about two weeks on one outstanding item tied to a fill-finish line, after which the FDA may reinspect; he suggested approval is unlikely within the next six months and may take longer.
• Abatacept: Israeli said he does not see an impact from denosumab-related issues because manufacturing lines differ. For the U.S., he said the company expects IV approval toward the end of calendar 2026 and anticipates subcutaneous approval aligned with patent timing in January or February 2028. For Europe, he said the company plans to submit in July 2026 with an expected 12-month review and a potential launch in July 2027; he estimated the European abatacept market at about $2 billion.

Regional performance: India and emerging markets offset U.S. decline

By geography, North America generics revenue was $338 million, down 16% year over year and 9% sequentially, which management attributed primarily to lower lenalidomide sales and price erosion in certain products. Israeli said the company launched six new products in the quarter.

Europe generics revenue was $140 million, up 4% year over year and sequentially, supported by NRT performance and new product launches, which helped offset generic price erosion. The company launched 10 new generics across European markets during the quarter.

Emerging markets revenue rose 32% year over year to ₹1,896 crore, with Israeli citing new launches and favorable foreign exchange. The company introduced 30 new products across countries. Within the segment, Israel said Russia grew 21% year over year and 16% sequentially in constant currency terms despite adverse macroeconomic conditions, and he told analysts that healthy double-digit growth is sustainable even if quarterly growth rates vary.

India revenue increased 19% year over year to ₹1,603 crore, driven by the innovation franchise, new brand launches, price increases, volumes, and contributions from the acquired Stugeron portfolio. In Q&A, Israeli said organic growth excluding acquisitions was “more than 17%,” and indicated the innovative portfolio is “somewhere between 10%–15%” of India sales. He said the strong India growth reflects the maturation of innovative brands in their second and third years post-launch and called mid-teens growth “very sustainable.”

The PSA business generated $92 million in revenue, down 5% year over year and 15% sequentially. The company filed 31 drug master files globally and completed 28 global generic filings during the quarter.

Looking ahead, management reiterated its focus on execution, including advancing semaglutide and abatacept, improving base business growth, driving operational efficiencies, and pursuing value-accretive acquisitions and partnerships. On cost trends, Israeli said SG&A growth should moderate, with the pace of cost growth expected to be “less than half” of top-line growth.

About Dr. Reddy’s Laboratories (NYSE:RDY)

Dr. Reddy’s Laboratories Ltd. is an India‐based multinational pharmaceutical company that develops, manufactures and markets a wide range of pharmaceutical products and services. Established in 1984 by the late Dr. Kallam Anji Reddy, the company has grown into a diversified healthcare enterprise offering generic and proprietary medicines, active pharmaceutical ingredients (APIs), biosimilars and custom research and manufacturing services (CRAMS). Its portfolio spans therapeutic areas such as oncology, cardiovascular care, dermatology, gastroenterology and pain management.

The company’s core activities include the development and commercialization of cost‐effective generic treatments for branded drugs that have lost patent protection, along with in‐house research into innovative molecule development.