Dr. Reddy's Laboratories (RDY) Q2 2027 earnings review
Dr. Reddy's margins rebound, but weight-loss drug suffers another recall
Dr. Reddy's Laboratories, the Indian maker of generic and branded medicines, stabilized its margins as overseas growth offset fading US cancer-drug sales. Revenue dipped 2% from a year ago to Rs. 86.7 billion, while profit per share fell 36% against last year's lenalidomide peak. Compared with last quarter, gross margin rebounded nearly 6 percentage points to 52.1%, returning to the company's 50% to 55% target range as India and emerging markets grew fast. Managing director G V Prasad credited cost control and branded drug sales, though one-time licensing deals in the US and Russia cushioned the top line.
| Revenue | Rs. 86.7B -1.5% from a year ago (+7.4% from last quarter) |
|---|---|
| Gross margin | 52.1% up from 46.5% last quarter (54.7% a year ago) |
| Profit per share | Rs. 11.10 -36% from a year ago (+109% from last quarter) |
| Full-year gross margin outlook | Unchanged 50% to 55% target range |
⚖️ Verdict: ⚪ Neutral
The story is unchanged because operational progress in branded markets was offset by a second quality setback for semaglutide, its key weight-loss drug. While chief executive Erez Israeli plans to resume shipping the drug by November after fixing last quarter's active-ingredient issue, the financial footnotes revealed an August recall in Canada for impurities and labelling errors that cost Rs. 710 million. Meanwhile, Middle East shipping disruptions and wage hikes pushed overhead costs up by more than 2 percentage points of sales.
The question now is whether the company can execute its two biggest pipeline launches this winter without further manufacturing stumbles. Either semaglutide reloads in November and the US drug regulator approves its abatacept arthritis copy in December, or quality and inspection hurdles delay the post-lenalidomide recovery into next year. Third-quarter North America revenue and the December regulatory decision will settle it.
🐂 Bull Case
India and Emerging Markets Offset US Decline
Dr. Reddy's is losing high-margin US sales of lenalidomide, a blood cancer drug facing generic competition. Managing director G V Prasad said the company is still "delivering double-digit base business growth" outside that one product. Branded medicines in India, emerging markets, and its nicotine replacement portfolio now bring in 53% of total revenue.
- North America generics: Rs. 24.9 billion, down 23.2% from a year ago but up 12.9% from last quarter
- Emerging markets: Rs. 20.6 billion, up 24.5% from a year ago on 27 product launches
- India: Rs. 18.5 billion, up 17.3% from a year ago, lifting its market rank from ninth to eighth
- Europe: Rs. 13.9 billion, up 1.3% from a year ago
This geographic shift matters because branded drugs in India and developing countries do not suffer the steep price drops common in US generics. In India, prescription tracking data showed the drugmaker grew 21.0% over the past three months, beating the overall Indian market's 14.7% pace because of new treatments and price increases.
What to watch: North America sequential revenue in the third quarter. A drop from this quarter's Rs. 24.9 billion would show that competition on drugs like bosutinib, a leukemia treatment losing its six-month exclusivity, is outpacing new launches.
Gross Margin Rebounded Into the Target Range
Finance chief Mannam Venkatanarasimham aims to keep gross margin between 50% and 55% now that lenalidomide sales have faded. Last quarter, gross margin fell to 46.5% after the company wrote off defective batches of semaglutide, its generic weight-loss and diabetes drug. This quarter, gross margin recovered by 5.6 percentage points to 52.1%, though it remains 2.5 percentage points below last year.
Cost of making the products fell to 47.9% of revenue from 53.5% last quarter. Chief executive Erez Israeli attributed the rebound to the 53% revenue share from higher-margin branded markets and six new US generic launches, including sugammadex, a hospital injection used to reverse anesthesia. Lower research spending, which dropped 1.0 percentage point of revenue to 6.0%, also helped operating profit reach 14.6% of sales.
What to watch: gross margin in the pharmaceutical services and active ingredients (PSAI) unit next quarter. It stood at 11.8% this quarter, well below its 18.0% level a year ago, and needs higher factory volumes to recover.
Positives this quarter didn't test
Three long-term growth drivers reached regulatory or commercial milestones this quarter, but their major revenue contributions still lie ahead.
- Contract manufacturing (CDMO): Aurigene, its custom drug manufacturing subsidiary, passed $100 million in twelve-month sales and signed a supply deal with a global drugmaker; full-year figures will show how fast that new contract scales.
- US rituximab approval: the US drug regulator approved its biosimilar (a near-identical copy of a complex biologic drug) for blood cancer and rheumatoid arthritis after an earlier rejection; partner Fresenius Kabi's launch will test its market share.
- Infectious disease partnerships: the company licensed Takeda's dengue vaccine for India and expanded its Gilead deal for lenacapavir, a once-yearly HIV prevention shot, across 120 countries; Indian vaccine sales begin in the first half of calendar 2027.
🐻 Bear Case
Quality Problems Hit Weight-Loss Drug Again
Semaglutide, a copy of Novo Nordisk's blockbuster diabetes and weight-loss treatment, is Dr. Reddy's most important near-term product launch. "Subject to successful validation, we expect to reload semaglutide both directly as well as to our partners by November 2026," chief executive Erez Israeli said. Last quarter, the company took a Rs. 2.40 billion charge because batches of the drug's active ingredient failed quality checks.
While the press release highlighted that generic semaglutide now holds approvals in 10 countries, the financial footnotes revealed a second, separate quality failure. In August 2026, the drugmaker recalled batches in Canada due to "elevated levels of unspecified impurity exceeding the approved specification limit and a packaging and labelling error", cutting this quarter's revenue by Rs. 710 million.
This matters because Canada is the largest early market for the product, and a rival generic is already selling there. Shipping newly made active ingredient to its fill-and-finish partner still requires three weeks of drug-product validation before sales can resume.
What to watch: third-quarter North America sales and inventory write-downs. Failure to ship part of the planned 6 million to 7 million injector pens this fiscal year would show that validation or Canadian supply setbacks are still costing market share.
Middle East Conflict Lifted Overhead Costs
Selling, general and administrative expenses — the cost of marketing, shipping, and corporate overhead — rose 6.2% from a year ago to Rs. 28.08 billion, even though total revenue fell 1.5%. As a share of revenue, these overhead costs climbed 2.4 percentage points from a year ago to 32.4%, well above the 28% target management discussed last year.
The company said the increase came from annual staff pay raises, currency swings, and higher shipping bills "due to supply chain disruptions arising from the Middle East crisis". On the call, Venkatanarasimham added that war-driven price increases across raw materials, chemical solvents, and export freight reduced the EBITDA margin (operating profit before depreciation and amortization) by about 1 percentage point.
What to watch: selling, general and administrative expenses as a percentage of revenue in the third quarter. Management expects research spending to rise by 1 to 2 percentage points of sales, so overhead costs must fall to keep its 20%-plus EBITDA margin promise.
Risks this quarter didn't answer
Two standing operational concerns remained unresolved this quarter and depend on upcoming regulatory decisions or multi-quarter transitions.
- Abatacept US approval and Bachupally plant clearance: the rheumatoid arthritis biosimilar faces a December 22, 2026 US regulatory decision after inspectors issued observations at the Hyderabad biologics plant in June and four more at a nearby formulations unit in August. "If you ask me, is there a chance that we will get a CRL? There is a chance," Israeli said, referring to a Complete Response Letter, which is a regulatory rejection.
- Nicotine replacement therapy (NRT) sales drop: revenue from the consumer brands acquired from Haleon fell 6% from a year ago to Rs. 6.6 billion because of the "continued impact of operating model change post-integration", which Israeli said will depress year-over-year revenue comparisons for two more quarters.
👓 Other Themes
One-Time Licensing Deals Cushioned Revenue Drop
Headline revenue dipped 1.5% from a year ago to Rs. 86.71 billion, but product sales fell 4.2% to Rs. 82.78 billion. License fees jumped nearly eightfold to Rs. 2.56 billion, including Rs. 529 million from the "sale of the Company’s territorial rights relating to Bendamustine HCL in the United States" and Rs. 976 million in Russian biosimilar milestones. Stripping out those two deals and the Canadian recall, revenue fell 2.4% by our math.
💲 Other KPIs
Cash generated from operations after tax fell 85.6% from Rs. 30.20 billion in the first half of last year. The drop occurred because the company paid out a $50 million (Rs. 4.53 billion) price-adjustment claim to US lenalidomide customers that it booked in the fourth quarter. To support cash collections, the Indian drugmaker sold Rs. 6.07 billion of customer bills to banks without recourse, up from Rs. 2.63 billion in March.
Stockpiles of raw materials and medicines rose 7.1% from a year ago and 6.1% since March, moving against the 1.5% drop in quarterly revenue. Even after last quarter's semaglutide write-off, the company recorded another Rs. 2.17 billion in inventory write-downs this quarter, up from Rs. 1.82 billion a year ago, as it builds stock for upcoming launches.
Cash and investments minus debt (excluding lease obligations) declined 9.0% from Rs. 27.51 billion a year ago and from Rs. 32.71 billion in March 2026. The company generated Rs. 1.71 billion in free cash flow this quarter, down 70.6% from a year ago by our math, and paid out Rs. 6.66 billion in shareholder dividends during the first half.
🔮 Guidance
Unchanged. Venkatanarasimham reiterated that gross margin will stay in the 50% to 55% band in the coming quarters, and said the second quarter's 52.1% reading should improve as semaglutide shipments resume. That leaves the second half well above the 49.4% first-half average, which was depressed by the first-quarter API write-off.
Raised. Management plans to spend 7% to 8% of revenue on research and development in the coming quarters, up from 6.0% this quarter and 6.6% in the first half. Spending dipped this quarter because of lower generic development activity, but will step back up as biologic and complex drug filings advance.
Cut. The finance chief trimmed the full-year factory and equipment spending plan by Rs. 1.5 billion at the middle of the range, to Rs. 16.5 billion, down 28.3% from last year's Rs. 23.0 billion by our math. Because the company spent only Rs. 5.83 billion in the first half, the plan implies Rs. 10.67 billion of spending in the second half.
Unchanged. Israeli expects the EBITDA margin to stay above 20% in the second half, and to exceed 21% if semaglutide reloads on schedule in November. That compares with 20.6% in the second quarter and 16.7% across the first half, though it remains below management's long-term 25% goal.
❓ Key Questions
What caused the Canadian semaglutide impurity and labelling recall?
The financial footnotes disclosed a Rs. 710 million revenue reduction in August 2026 for an impurity and labelling recall in Canada, separate from the first-quarter active ingredient failure. Management did not discuss this recall on the call or explain which manufacturing partner was responsible.
Why did non-recourse receivables factoring more than double since March?
Derecognized trade receivables sold to banks rose from Rs. 2.63 billion in March to Rs. 6.07 billion in September. Without that Rs. 3.45 billion increase, first-half operating cash flow of Rs. 4.36 billion would have been nearly wiped out.
What is the recurring revenue run rate without licensing deals?
North America and Emerging Markets segment revenues included Rs. 529 million from selling US bendamustine rights and Rs. 976 million in Russian biosimilar milestones. Management did not state whether similar divestments or milestone payments are baked into its second-half margin outlook.
When will the US FDA issue the Bachupally inspection classification?
The company is still waiting for the Establishment Inspection Report from the June 2026 inspection of its Hyderabad biologics plant ahead of the December 22, 2026 goal date for abatacept. A negative classification would delay its biggest US pipeline product.