Dr. Reddy’s Earnings Call: Growth vs. Margin Pain
Dr. Reddy’s Laboratories Ltd ((RDY)) has held its Q4 earnings call. Read on for the main highlights of the call.
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Dr. Reddy’s Laboratories’ latest earnings call struck a mixed tone, blending record annual revenues and strong strategic progress with a sharp Q4 profitability hit. Management argued that most headwinds, including a large lenalidomide‑related adjustment and impairments, are one‑offs, and reaffirmed confidence in base business growth, margin recovery, and new growth engines like semaglutide and biosimilars.
Record Revenues Amid Product Headwinds
Dr. Reddy’s reported adjusted full‑year revenue of INR 34,046 crores, or about USD 3.63 billion, marking a 4.6% year‑on‑year increase. Management highlighted this as the company’s “highest ever annual revenues,” achieved despite significant product‑specific headwinds, particularly in North America.
Base Business Growing Double Digits
Excluding the impact of lenalidomide, the company’s base business delivered double‑digit growth in both Q4 and the full year. All geographies except North America recorded double‑digit growth, underscoring underlying demand strength across key markets.
Launch Cadence and Filing Pipeline Accelerate
Product development momentum remained strong, with seven new product launches in North America in Q4 and 49 in Emerging Markets, taking the EM total to 129 in FY’26. The company also filed 48 Drug Master Files in Q4 and 128 in FY’26, reinforcing its medium‑term growth pipeline.
Semaglutide Builds a New Growth Platform
Dr. Reddy’s achieved a first‑to‑market approval for injectable semaglutide in Canada, following an earlier day‑one launch in India under the Obeda brand. Oral semaglutide has also been approved in India, and the company aims to reach about 6–7 million pens by end‑2026 and roughly 12 million units across markets in FY’27, subject to approvals.
Biosimilars and Abatacept Scale‑Up Prospects
The U.S. FDA has accepted the Biologics License Application for IV abatacept, filed in December 2025, with a potential early‑2027 launch. Biologics sales already exceed USD 100 million, and management expects abatacept to materially scale the biosimilars business and help drive it toward breakeven post‑launch.
Solid Full‑Year Profitability on an Adjusted Basis
On an adjusted basis, FY’26 EBITDA reached INR 8,419 crores, or about USD 897 million, implying a margin of roughly 24.7%. Adjusted profit before tax was INR 6,463 crores, translating into a margin of around 19% on adjusted revenues.
Strong Balance Sheet and Cash Generation
Free cash flow before acquisitions totaled INR 2,004 crores in FY’26, against CapEx of INR 2,302 crores, leaving the company with a net cash surplus of INR 3,271 crores at year‑end. For FY’27, CapEx is guided at about INR 2,000 crores, signaling continued investment with ample balance sheet flexibility.
Sustainability and Governance Accolades
Dr. Reddy’s secured an EcoVadis Gold medal with its highest‑ever score of 80, placing it in the top 5% of companies globally on that platform. It was also named the top sustainable company in Indian healthcare and recognized for the third consecutive year in the leadership category of a prominent corporate governance index.
Rewarding Shareholders via Dividend
The board has recommended a dividend of INR 8 per equity share with a face value of INR 1 for FY’26, equivalent to 800% of face value. The payout remains subject to shareholder approval but underscores management’s commitment to returning cash amid ongoing investment needs.
Cost Discipline and Sharper R&D Focus
Adjusted R&D spending, excluding one‑offs, stood at INR 2,385 crores in FY’26, down 13% year‑on‑year and about 7% of adjusted revenues. With Q4 R&D at INR 541 crores, down 26% YoY, the company plans FY’27 R&D at roughly 7–8% of revenue while targeting margin recovery through cost efficiencies and productivity gains.
One‑Off Charges Drag Reported Profits
Q4 results were heavily distorted by one‑offs, including a lenalidomide shelf‑stock adjustment of INR 453 crores that cut reported revenue. Additional charges included a VAT provision of INR 114 crores and impairment costs of INR 259 crores in the quarter, totaling INR 352 crores for the year.
Q4 Profitability Under Significant Pressure
Adjusted profit before tax for Q4 was INR 994 crores, but reported PBT dropped to INR 199 crores after one‑offs. Profit after tax attributable to equity holders came in at just INR 220 crores, implying a slim 2.9% margin on reported revenues for the quarter.
Quarterly Revenue and EBITDA See Sharp Declines
Adjusted Q4 revenue of INR 7,969 crores, or about USD 849 million, fell 6% year‑on‑year and 9% sequentially. Underlying EBITDA of INR 1,554 crores declined 37% YoY and 28% QoQ, with margins sliding to 19.5% on adjusted revenues as key products rolled off.
Gross Margins Squeezed by Mix and Pricing
Adjusted gross margin in Q4 fell to 48%, down roughly 760 basis points year‑on‑year and 615 basis points quarter‑on‑quarter. For the full year, gross margin was 53.5%, nearly 500 basis points lower than the prior year, mainly due to reduced lenalidomide sales and price erosion in unbranded generics.
North America Hit by Lenalidomide Shock
North America revenue in Q4 was USD 199 million, or USD 251 million excluding the shelf‑stock adjustment, still marking a steep 40% YoY and 26% QoQ decline. Full‑year North America revenue fell about 21% year‑on‑year to USD 1.36 billion excluding the adjustment, with management calling the SSA size unexpected and customer‑driven.
Regulatory and Launch Timing Risks
The company flagged delays and uncertainties around key regulatory decisions, including a pending semaglutide approval in Brazil as it works with the local agency. Approval timelines for denosumab in the U.S. and abatacept also hinge on partner actions and inspections, which could shift revenue ramps for these assets.
CAR‑T Exit Reflects R&D Reprioritization
Dr. Reddy’s has discontinued its CAR‑T R&D programs, resulting in an impairment charge of about INR 135 crores. The move signals a deliberate shift away from high‑risk cell‑therapy bets toward more near‑term, commercially scalable opportunities.
Working Capital Intensity Increases
Operating working capital rose to INR 14,434 crores as of March 31, 2026, an increase of INR 2,920 crores versus the end of the previous quarter. The higher working capital means more cash is tied up in operations, a point of concern that management will need to address to sustain free cash flow.
Margins Pressured in Generics and PSAI
Price erosion in unbranded generics weighed on profitability, compounding the impact of lower lenalidomide contribution. The PSAI business posted Q4 revenue of USD 101 million, down 10% year‑on‑year, as lower API volume uptake reflected softer demand and pricing pressure.
Guidance Points to Recovery and New Growth Engines
Looking ahead, management expects the base business to sustain double‑digit growth and gross margins to move back above 50% in FY’27, with SG&A broadly stable at 31–33% of revenue and R&D at 7–8%. They reaffirmed semaglutide guidance of about 12 million pens in FY’27, a price floor near USD 25–30 per unit, wider launches across 50+ markets, and a ramping biosimilars franchise that could reach the mid‑hundreds of millions to roughly USD 0.5–0.7 billion over time, including an early‑2027 abatacept IV launch.
Dr. Reddy’s earnings call painted a company in transition, cushioning structural growth with painful near‑term hits to margins and cash efficiency. For investors, the story now hinges on how quickly margins normalize, semaglutide and biosimilars scale, and North America stabilizes, with management betting that FY’27 will mark a clearer turn toward higher‑quality, more diversified earnings.
