Dr. Reddy’s Earnings: Wraps Up 2024 on Strong Footing, and Long-Term Outlook Looks More Favorable

No-moat Dr. Reddy’s reported fourth-quarter earnings that came in higher than we expected. Total sales were up 12.5% year over year as demand and prescription utilization trends continue their strong momentum and help the firm end its fiscal year on a strong note. On top of solid performance, Dr. Reddy’s was busy during the quarter with a number of notable highlights, including a launch of Versavo, biosimilar of Avastin (bevacizumab), in the UK that marks the firm’s first entrance in the region’s biosimilar market. Management also spent some time during the call discussing investments in fueling its biosimilars pipeline. We think this is a sound strategy given our positive long-term outlook on the biosimilars market, particularly the US, and we think Dr. Reddy’s is well positioned to utilize its scale and low-cost manufacturing to carve out a share in the marketplace. While we now expect higher operating expenses in later years of our valuation model as we believe the firm needs to allocate higher spending in both research and development and selling, general, and administrative to ramp up its pipeline, we think this will be more than offset by higher gross margin that biosimilars and complex generics carry. After updating our fiscal 2024 numbers as well as ticking up our long-term outlook for the firm, we raise our fair value estimate to $60 from $54 per share.