Dr Reddy's Slumps as Semaglutide Supply Disruptions and Margins Slash Analyst Estimates

Dr Reddy's Slumps as Semaglutide Supply Disruptions and Margins Slash Analyst Estimates​

Shares of Dr Reddy's Laboratories declined significantly on July 22 after brokerages slashed their earnings forecasts amid weaker-than-expected quarterly results and critical supply chain disruptions involving semaglutide. The stock saw a sharp fall, trading up to 4.4% lower in early trading sessions.

The company's Q1 performance reignited concerns regarding its core profitability despite growth in the branded business. Analysts are now pointing towards the timely restart of semaglutide supplies and the regulatory approval of biosimilar abatacept as crucial determinants for future recovery.

Financial Performance Hits Estimates Amid Margin Pressure​

Revenue from operations fell 5.5% to ₹8,100 crore, missing analysts' consensus estimate of ₹8,160 crore. Consolidated net profit plummeted by 68.7% to ₹444 crore in the quarter ended June 30, falling short of the estimated ₹722 crore, according to LSEG data.

The company's Q1 adj. EBITDA margin stood at 14.3%, which was 330 basis points below estimates. This decline was attributed by the brokerage to higher SG&A and freight costs, underscoring structural weaknesses in profitability.

While North America sales slumped 35.3% due to pricing pressure and increasing competition, revenue from India still saw a strong increase of 16.8% reaching ₹1,720 crore. Dr Reddy's anticipates that domestic semaglutide sales will grow broadly in line with the market trajectory.

Semaglutide Halts and Management Targets Slashed​

A major setback came from an impurity issue in the active ingredient of its key drug, forcing Dr Reddy’s to halt production of new batches in both approved countries. This disruption involves semaglutide, a product positioned as a primary growth driver for the company in India and select overseas markets.

The supply interruption necessitated management cutting the fiscal-year semaglutide sales target from an estimated 12 million pens down to 6 million to 7 million pens. The generic version of semaglutide was reported to be unavailable in India and Canada until at least late October.

Dr Reddy's booked a one-time provision of ₹239 crore for inventory and other costs directly linked to the supply disruption during the first quarter. Nirmal Bang, an analyst, commented that the immediate earnings impact is likely to come from lost sales and fixed commercial costs incurred during this interruption.

Brokerages Downgrade Ratings Citing Core Weakness​

JPMorgan maintained its "underweight" rating on Dr Reddy's stock while cutting its target price to ₹1,100 from ₹1,200. The brokerage cited persistent weak core profitability despite growth in the branded business. Furthermore, JPMorgan lowered its fiscal 2028 earnings estimates by 12% to 17%.

Citi reiterated a "sell" rating and reduced its target price to ₹1,040. Citi noted that first-quarter margins reinforced concerns about the company's core operations. The report highlighted that US sales of $236 million saw a decline of 6% quarter over quarter.

Analysts across the board cautioned that the path toward recovery is dependent on two critical elements: the resumption of semaglutide supply in November and regulatory progression for abatacept. However, any further delays in these areas could trigger additional earnings cuts and sustain pressure on the stock.