Dr Reddy's earnings are a mixed bag

There are some surprises in Dr Reddy's Laboratories financial results for the fourth quarter and for the last full year.

First, analysts were disappointed at the performance by the company's PSAI (Pharmaceutical Services and Active Ingredients). Revenues from PSAI for FY14 stood at Rs 24 billion, which meant a year-on-year decline of 22 per cent. However, there was one thing which stood out: the increase in R&D spending. Research & Development (R&D) expenses for FY 14 were at Rs 12.4 billion, a year-on-year increase of 62 per cent. These expenses at 9.4 per cent to revenues versus 6.6 per cent to revenues as in FY13.

What is more, the R&D expenses for Q4 FY14 of Rs 4.0 billion, which on a consolidated revenues for the Rs 34.8 billion for the quarter would mean 11 per cent of revenues, which, analysts feel could be a huge positive.

The increase in spending is being directed towards building a pipeline of differentiated / difficult to make generic products that have limited competition in the US market, on biologics and on building its pipeline of proprietary products (read: tweaking of existing generics to come out with different efficacy) and there are some estimated 10 such products in the pipeline.

The company has so far not launched any of these on its own though it has three such in the US market already in the dermatology space but these have been in-licensed.

What has however got many analysts disappointed was the performance by the company's PSAI. This, says Surajit Pal of Prabhudas Lilladher, was a major drag on the results. The company attributes the decline to "a challenging year on the external market front due to lower demand from key customers coupled with lesser number of launches as compared to the previous year."

In a significant development, the company has made changes in the roles of the top management and there were some surprises there too. Satish Reddy, son of Dr Reddy's founder K Anji Reddy, who until now was the vice-chairman, managing director and COO has been made the chairman of the board and G V Prasad, son-in-law of Anji Reddy, who was designated the chairman after Anji Reddy and has been the company's chairman and CEO, will continue his role as the CEO and has been designated as co-chairman and managing director.

What is the trigger for this and why now? Satish Reddy, speaking to media after the results, attributes this to a move towards good governance where in the role of chairman and CEO is being separated.