Dr. Reddy's: Semaglutide Setback Masks a Resilient Core, but Abatacept Looms as the Next Inflection
Q1 FY27 earnings hit by a one-off semaglutide API provision and Middle East freight costs, yet base business growth remains double-digit and the biosimilar pipeline advances toward a December abatacept goal date.
DRREDDY.NS · Earnings Call · 2026-07-22
Kinks in the GLP-1 Engine
Dr. Reddy's first quarter of FY2027 delivered a 5.6% revenue decline and an EBITDA margin of 12.5%, dragged down by a INR 240 crore provision for rejected semaglutide API batches and a loss of production linked to the same issue. The company stopped selling pens in early June after detecting out-of-specification material, and CFO M. V. Narasimham noted the provision also covered inventory and other costs. "We are working towards resolving the issue and are planning to resume semaglutide commercial supplies by November," said CEO Erez Israeli, who added that the root cause has been identified and a program is underway to retest the API. The company sold 180,000 pens before the halt, but expects to recover with 6–7 million pens between November and March, backed by orders from partners like Sandoz and Aspen. The market initially priced in a worse outcome; the Middle East conflict also added solvent and freight costs, though management quantified the combined EBITDA impact at about 1%. Excluding the semaglutide provision, underlying EBITDA margin would have been in the high teens, roughly 18%, consistent with the prior quarter's adjusted level. The company reiterated its full-year margin guidance of around 20% ex-semaglutide, with a bullish Wegovy Pill (and broader GLP-1) franchise expected to add incremental volume once supply resumes.
We are working towards resolving the issue and are planning to resume semaglutide commercial supplies by November. Importantly, there is no risk to any patient who has consumed the product.
Core Business: Double‑Digit Growth Beyond the Noise
Stripping out lenalidomide and semaglutide, the base business expanded double-digit across all key geographies. North America generics revenue of $236 million declined 41% YoY, but ex‑lenalidomide the segment grew double-digit, helped by five new launches including first-to-market bosutinib (with 180 days of exclusivity on the 400 mg strength) and nintedanib. India revenues grew 17% YoY (15.5% organic) with the innovation franchise outperforming the IPM; emerging markets were up 31% YoY on new launches and favourable FX. The branded business (including India, EM, and NRT) now represents 42% of sales and is a stable margin anchor. Management highlighted that SG&A growth is being held to low single digits while sales grow double-digit, a productivity gap that should widen as the year progresses. "We are planning to grow double-digit, and we are planning to grow the associated cost by a low single-digit," Israeli said.
Abatacept: The Next Catalyst
The company is awaiting FDA action on its abatacept biosimilar, with a goal date in mid‑December. The pre‑license inspection at Bachupally (which also covers rituximab) concluded with seven observations, all addressable, and the response was submitted within the timeline. Management expects approval without further queries, and the IV formulation could launch upon approval, positioning Dr. Reddy's as a first-mover in a market where the innovator's IP expires. The subcutaneous version is targeted for 2028. The biosimilar portfolio, including rituximab and denosumab (with partner Alvotech), remains a growth engine, though management is cautious about competitive dynamics. "We have a long pipeline for the future, both on the peptides as well as additional biosimilars," Israeli said, while CFO Narasimham guided R&D at 7–8% of sales. The company's net cash position stands at ~INR 3,057 crore, which will fund business development initiatives across generics, biosimilars, and innovation.
Tariffs and Geopolitics: Overhangs, Not Fatalities
When asked about a recent U.S. presidential tweet suggesting tariffs on generic drugs, Israeli downplayed the risk: "Between the tweet and reality, a lot of things are likely to happen. As we speak, I do not see any reason to be concerned." He noted that 25–30% of revenues are already manufactured by U.S. CMOs, and the company has navigated tariff uncertainty before. The tariff uncertainty remains a global theme, but Dr. Reddy's input exposure appears manageable. Meanwhile, the company is also hedging currency risk with $354 million of forwards and risk-reversals maturing by March 2027.
Priorities and Patient Capital
Compared to the prior quarter, management reiterated its commitment to double-digit base growth and ~20% EBITDA margins ex‑semaglutide. The semaglutide mishap is a clear setback—lost sales of roughly 3–4 million pens, plus the provision—but the underlying businesses are healthy. As Israeli noted, "The strength of our base business and our ongoing productivity initiatives will continue to support double-digit base business growth and steady margin improvement." The abatacept decision is the next major catalyst, with the potential to significantly boost biologics revenue and profitability. In the meantime, the company's balanced capital deployment (CapEx guided to ~INR 1,800 crore, down from INR 2,500–2,700 crore) and continued buybacks underpin shareholder returns.