Gross profit increased to 2.7 billion rupees from 2.4 billion rupees compared to the prior third quarter, but net income was below expectations at 592 million rupees, the result of mounting legal and R&D costs resulting from the company's strategy of developing generic forms of in-patent drugs and challenging the originators' exclusivity in the courts.
Dr Reddy's was expected to put in a good third quarter as the effects of the end of its exclusive marketing rights for fluoxetine (Eli Lilly's Prozac) in the US, which came to an end in January 2002, levelled off. But ongoing patent challenges to Pfizer's cardiovascular drug Norvasc (amlodipine) and Eli Lilly's schizophrenia treatment Zyprexa (olanzapine) pegged back net profits.
R&D expenditure increased by nearly 60 per cent to 516 million rupees, and now stands at 10 per cent of total revenues, not too far away from the level of investment at the pharmaceutical majors. The increase in R&D expenditure reflects Dr Reddy's shift into novel drug discovery, as well as the development of new generics and specialty products.
API business healthy
Dr Reddy's active pharmaceutical ingredients (API) unit saw turnover of 1.9 billion rupees for the quarter, a 32 per cent jump. North America and Europe accounted for 53 per cent of API segment revenues, as total sales in Europe rocketed to 534 million rupees from 59 million rupees in the like, year-earlier period. This substantial increase was driven by a robust performance from the antihypertensive drug ramipril, which made sales of 465 million rupees.
Revenues from North America declined to 491 million rupees from 589 million rupees, as income from the gastrointestinal drug nizatidine decreased. Meanwhile, turnover in India rose 34 per cent to 538 million rupees during the quarter, led by strong volume growth.
The generics business realized revenues of 1 billion rupees in the quarter, up 6 per cent from the same period of 2003. Sales in North America of 856 million rupees comprised 81per cent of total segment turnover, as new products launched in the year contributed 102 million rupees to total revenues, buffering the declining sales of the muscle relaxant tizanidine.
Generic sales in Europe dropped nearly 20 per cent to 198 million rupees, as a result of slipping omeprazole sales and increased competition.