Dr. Reddy's Q2 FY26: Navigating Headwinds with Strategic Growth and Pipeline Momentum

Dr. Reddy's Laboratories Ltd. has reported a resilient performance for the second quarter of fiscal year 2026 (Q2 FY26), demonstrating near double-digit growth and steady profitability despite facing specific challenges in its North America Generics business. The company's consolidated revenues for the quarter stood at ₹8,805 crore, marking a 9.8% year-on-year increase and a 3% sequential growth. This robust top-line performance was complemented by a strong EBITDA of ₹2,351 crore, maintaining a healthy margin of 26.7%. Profit after tax attributable to equity holders also saw a commendable 14% year-on-year growth, reaching ₹1,437 crore, reflecting a 16.3% of revenues.

The company's growth narrative for Q2 FY26 was largely driven by broad-based contributions across its diverse business segments and geographies. While the North America Generics segment experienced a decline, other key markets stepped up significantly. India delivered a strong double-digit growth of 13% year-on-year, outpacing the Indian Pharmaceutical Market's growth. Europe witnessed an impressive 138% year-on-year growth, primarily boosted by the acquired Nicotine Replacement Therapy (NRT) business. Emerging Markets also contributed positively with a 14% year-on-year increase, fueled by new product launches and favorable foreign exchange movements. This geographical diversification proved crucial in mitigating the impact of specific market pressures.

Strategic Initiatives and Pipeline Momentum

Dr. Reddy's continued to make meaningful progress on its strategic priorities, focusing on growing its base business, scaling consumer healthcare, and advancing innovative therapies and biosimilars. A significant highlight was the acquisition of Stugeron® and related brands for 18 markets in APAC and EMEA, including key markets like India and Vietnam. This move strengthens the company's anti-vertigo segment and expands its portfolio. In India, the company launched two novel Gastro-Intestinal drugs, Tegoprazan (PCAB®) and Linaclotide (Colozo®), further solidifying its domestic franchise.

The company's innovation-led portfolio also saw significant advancements. The Subject Expert Committee (SEC) under CDSCO recommended approval for its Semaglutide injection in India, signaling a potential new growth driver. Furthermore, the European Medicines Agency's (EMA) CHMP provided a positive opinion for Dr. Reddy's denosumab biosimilar candidate. The USFDA also accepted the Investigational New Drug (IND) application for COYA 302, a partnered novel drug for the treatment of ALS. The integration of the acquired NRT business is progressing ahead of schedule, with two-thirds of the business value already integrated, contributing positively to both growth and margins.

Operational Efficiency and Regulatory Landscape

Despite the positive momentum, the quarter also saw some operational and regulatory challenges. The consolidated gross profit margin decreased due to lower Lenalidomide sales, product-specific price erosion in US Generics, one-time inventory provisions for discontinued pipeline products, and lower operating leverage in the PSAI business. The company also reported an impairment charge of ₹66 crore, including ₹54 crore related to its Middleburgh facility following a pipeline product discontinuation. SG&A expenses included a one-time provision of ₹70 crore for a VAT liability.

On the regulatory front, while some facilities like FTO-11 and CTO-5 Middleburgh received 'VAI' (Voluntary Action Indicated) classifications post-inspections, the Bachupally biologics facility received a Form 483 with five observations during a Pre-Approval Inspection. A Complete Response Letter (CRL) was also issued regarding the Rituximab biosimilar candidate. Management acknowledged these observations and is actively working to address them, with plans for a CMO in the United States to mitigate risks for products like Abatacept.

Outlook and Investor Confidence

Dr. Reddy's management expressed confidence in its strategic direction and future growth trajectory. They anticipate the BLA submission for Abatacept by December 2025, with a target launch for the subcutaneous version in early 2028. The company is also optimistic about its Semaglutide launch, projecting sales of 12 million pens initially, with capacity scaling up significantly. Management reiterated its commitment to maintaining margins and growth in the coming two years, expecting PSAI gross margins to be in the 20-25% range and SG&A in the 28-30% range for FY27.

The company's sustained focus on innovation, strategic collaborations, and operational efficiencies, coupled with its strong balance sheet and commitment to ESG principles, underpins its long-term value creation strategy. Despite the inherent complexities of the pharmaceutical industry, Dr. Reddy's demonstrates a clear vision and disciplined execution to deliver sustainable growth and profitability for its stakeholders.