Dr. Reddy’s Q3 Earnings Call: Growth Amid Margin Strain

Dr. Reddy’s Laboratories Ltd ((RDY)) has held its Q3 earnings call. Read on for the main highlights of the call.

Dr. Reddy’s Labs Balances Growth Engines With Margin Squeeze in Mixed Q3 Call

The earnings call from Dr. Reddy’s Laboratories painted a cautiously constructive picture: revenue and base-business momentum remained solid, powered by India and emerging markets, while the pipeline delivered notable regulatory wins in diabetes and biosimilars. Management emphasized a strong cash position and disciplined capital allocation. Yet investors must contend with visible margin compression, profit declines, and ongoing U.S. generics softness, especially as the once-powerful Lenalidomide tailwind fades. Regulatory setbacks in key biologics further cloud near‑term upside, even as the longer‑term story in complex products and innovation continues to build.

Revenue Growth and Base Business Momentum

Consolidated Q3 FY’26 revenue rose 4.4% year on year to INR 8,727 crore (USD 971 million), though slipped 0.9% sequentially. The underlying picture is stronger than the headline: excluding the high‑margin but declining Lenalidomide business, the base portfolio delivered double‑digit growth, helped by favorable foreign exchange. This underscores that the core franchise is expanding even as legacy U.S. profit pools normalize, a key point for investors trying to gauge sustainable earnings power beyond the one‑off windfall products.

Strong India and Emerging Markets Performance

India and emerging markets were the standout growth engines. India revenue climbed 19% year on year to INR 1,603 crore, with underlying organic growth around 17–18% when adjusted for the impact of Stugeron. Dr. Reddy’s outpaced the Indian pharma market both on a quarterly and rolling 12‑month basis, indicating market-share gains rather than just sectoral tailwinds. Emerging markets revenue surged 32% year on year to INR 1,896 crore and 15% sequentially, with Russia up about 21% in constant currency. This diversified growth footprint helps buffer the volatility in the U.S. generics business and reinforces the company’s tilt toward faster-growing geographies.

Pipeline and Strategic Regulatory Progress

Management highlighted a string of pipeline milestones that support the medium‑term growth narrative. Semaglutide injections have received marketing authorization and local manufacturing approval in India, with launch targeted for March 21, positioning Dr. Reddy’s in the high‑growth GLP‑1 diabetes/obesity space. Filings for semaglutide are progressing across multiple emerging markets, with a response already submitted to Health Canada and a decision expected by May. In autoimmune therapies, an IV abatacept biologic license application has been filed, with a subcutaneous version targeted for filing in July 2026 and European launch plans around July 2027. These moves deepen the company’s presence in complex biologics and specialty therapies, potentially offsetting pressures in commoditized generics over time.

Biologics and Biosimilars Approvals in Europe

In Europe, Dr. Reddy’s scored a notable biosimilar win with denosumab. The product received a positive CHMP opinion, followed by European Commission and U.K. MHRA approvals, and has already been launched in Germany. Preparations are underway for launches in the U.K. and other European markets. This validates the company’s biologics capabilities, opens a new revenue stream in the high‑value osteoporosis space, and demonstrates execution on complex launches in regulated markets. While the U.S. path for denosumab is under regulatory cloud, the European roll‑out offers a meaningful, nearer‑term earnings contribution.

Cash Generation and Strong Liquidity Position

Despite margin headwinds, Dr. Reddy’s balance sheet remains robust. Free cash flow for the quarter was INR 374 crore (USD 42 million), against capex of INR 669 crore (USD 75 million), reflecting continued investment alongside positive cash generation. The company ended the quarter with a net cash surplus of INR 3,069 crore (USD 342 million), giving it ample financial flexibility for R&D, capex, and bolt‑on acquisitions. Active hedging of USD 481 million at INR 89.1–90.3 and RUB 2.93 billion at fixed rates helps manage currency volatility, particularly relevant given the company’s growing emerging‑market footprint.

Commercial Execution and New Product Launches

Commercial execution remained busy across regions and portfolios. During the quarter, Dr. Reddy’s launched 30 new products in emerging markets, 10 new generics in Europe, and 6 in North America, while introducing 2 new brands in India. On the development side, the company filed 31 Drug Master Files globally and completed 28 generic filings, replenishing the medium‑term launch pipeline. This steady cadence of launches and filings is critical to defending and expanding market share in generics, where price erosion remains a structural feature.

Acquisition Integration and Consumer Health Traction

The integration of the acquired Nicotine Replacement Therapy (NRT) portfolio is progressing in line with plan, with about 85% of the business by value now under Dr. Reddy’s operational control. The NRT franchise delivered roughly 25% reported growth year on year, or around 8% in constant currency, and continues to operate at or above the targeted EBITDA margin of about 25%. This supports the thesis that carefully selected consumer health acquisitions can be earnings‑accretive and diversify revenues into more brand‑driven, less volatile segments.

Sustainability and CDMO/Innovation Advances

Dr. Reddy’s is also leaning into sustainability and innovation as strategic differentiators. The company has committed to a science‑based net‑zero target by FY2045, making it the first Indian pharma player to do so, and has secured leadership scores in key environmental disclosure platforms. On the innovation side, its Aurigene unit served as exclusive API manufacturer for two novel drugs approved by the USFDA in 2025 and advanced three discovery programs via the Aurigene.Ai platform. These developments, while not immediately transformative to earnings, enhance the company’s profile as a capable partner in contract development and manufacturing (CDMO) and early‑stage discovery.

Margin Compression and Profit Declines

The key blemish in the quarter was profitability. Consolidated gross margin fell 505 basis points year on year to 53.6%, and 104 bps sequentially, reflecting the waning Lenalidomide contribution and mix pressures. Reported EBITDA margin slipped to 23.5%, with adjusted margin at 24.8% after excluding a one‑time labor‑law provision. EBITDA declined 11% year on year and 13% quarter on quarter to INR 2,049 crore (USD 228 million). Profit after tax dropped 14% year on year and 16% sequentially to INR 1,210 crore (USD 135 million), with diluted EPS at INR 14.52. For equity investors, the message is clear: topline resilience is not yet translating into stable earnings, and margin normalization remains a central risk to near‑term valuation.

North America Generics Weakness and Lenalidomide Cliff

North America generics continued to drag results. Revenue in the region fell 16% year on year and 9% sequentially to USD 338 million, primarily due to lower Lenalidomide sales and ongoing price erosion in the broader U.S. generics portfolio. Management flagged that Lenalidomide’s contribution will be “materially reduced” from Q4 onwards, effectively removing a major earnings tailwind. While the base U.S. business and new launches may gradually fill the gap, investors should expect a period of earnings digestion as the company transitions from a Lenalidomide‑boosted P&L to a more normalized margin profile.

Regulatory and Inspection Setbacks in Biologics

The biologics strategy, while promising, faces regulatory bumps. USFDA inspections at the FTO‑SEZ (Srikakulam) site resulted in a Form 483 with five observations, and the company received a post‑application action letter on rituximab, indicating the need for further remedial steps and likely delays. Meanwhile, partner Alvotech received a Complete Response Letter (CRL) for the denosumab BLA tied to a pre‑license inspection of its facility. Management indicated that U.S. launch timing for denosumab is now uncertain and could slip into FY’27 or later, with rituximab potentially facing delays of more than six months pending reinspection. These setbacks push out key biologic revenue drivers and add execution risk to the mid‑term growth story.

Rising SG&A and One-Time Labor Provision

Operating expenses moved higher as the company continued to invest in growth and absorbed a regulatory‑driven one‑off. SG&A rose 12% year on year and 2% sequentially to INR 2,692 crore (USD 300 million), reaching about 31% of revenue, up 199 basis points year on year. A one‑time provision related to new labor code changes, referenced at around INR 117 crore during Q&A, inflated costs this quarter. Management expects only a modest structural impact from the labor changes (less than 50 bps on an ongoing basis) and signaled tighter control on discretionary spending going forward. Still, investors will watch closely to see if SG&A can decelerate in line with guidance while the company maintains commercial momentum.

PSAI and Other Segment Softness

The PSAI (Pharmaceutical Services and Active Ingredients) segment showed softness, with revenue declining 5% year on year and 15% quarter on quarter to USD 92 million. Management indicated that, excluding Lenalidomide, gross margins for global generics and PSAI are likely to settle in the 50–55% range, implying structurally lower profitability versus the peak periods when Lenalidomide was a significant contributor. This normalization highlights the importance of scaling higher‑value products, biosimilars, and CDMO offerings to support blended margins.

Working Capital Build and Operational Intensity

Operating working capital increased to INR 14,142 crore (USD 1.57 billion) as of December 31, 2025, up INR 811 crore sequentially. The higher working capital reflects greater capital tied up in inventories and receivables amid a growing and more complex global footprint. While the balance sheet remains strong, sustained working‑capital build could weigh on free cash flow if not actively managed, especially as the company simultaneously ramps capex and R&D.

Forward-Looking Guidance and Management Outlook

Management reiterated its key medium‑term financial and strategic guardrails. R&D is expected to remain at 7–8% of revenues, supporting a robust pipeline in complex generics, biosimilars, and innovation platforms. Underlying EBITDA margin is guided at around 25%, broadly in line with the adjusted Q3 margin of 24.8%, even as post‑Lenalidomide gross margins for global generics and PSAI normalize in the 50–55% band. SG&A growth is expected to moderate, with management targeting expense growth at less than half the rate of revenue growth once the one‑off labor provision is behind them. On the pipeline, the company outlined a busy schedule: semaglutide launch in India in March, regulatory milestones across Canada and key emerging markets through mid‑year, and a multi‑year ramp for abatacept in the U.S. and Europe. By contrast, U.S. timelines for denosumab and rituximab are likely pushed into mid‑to‑late FY’27 or beyond. Capex, free cash flow, and a sizeable net cash surplus provide the financial underpinning for these plans.

In closing, Dr. Reddy’s latest earnings call underscored a transition phase: strong growth in India and emerging markets, expanding launch pipelines, and a fortified balance sheet are offset by margin pressure, profit declines, and biologics‑related regulatory delays. The fading Lenalidomide boost will test the resilience of the company’s diversified portfolio and its ability to scale new complex and specialty products. For investors, the story is less about immediate earnings acceleration and more about whether the company can execute through this reset to deliver sustainable, mid‑20s EBITDA margins and convert its growing pipeline into durable cash flows over the next few years.