Reddy for a Rollercoaster Ride

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The never-ending rollercoaster ride of Dr. Reddy's Laboratories' (NYSE: RDY) sales figures continues with a plummet into a valley -- albeit a foreseen one.

Revenues slipped 37% from the year-ago quarter, but the 2006 quarter saw large contributions from authorized generic versions of Merck's (NYSE: MRK) Zocor and Proscar. It is important to note that authorized generics are limited licenses that pharmaceutical companies grant to one generic company to compete against the generic-drug maker that gets the exclusive period (first to file an ANDA). Thus they're a limited-time revenue stream with an expected expiration date. Excluding the authorized generics, the generic-drug maker saw a 4% increase in revenues across its entire product line, driven in part by a generic version of Sanofi-Aventis' (NYSE: SNY) Alegra. Considering the 15% rupee appreciation in the last 12 months, the modest increase in sales is excusable.

Gross profit margins increased to 51% from 41% in the year-ago quarter, but it's nothing to get too excited about; the low level last year was due to those authorized generics that fetch low gross margins. Dr. Reddy's expects to be able to push up gross margins further as it moves manufacturing of drugs from its betapharm acquisition to lower-cost plants in India.

The company, which was rumored to be interested in acquiring U.S.-based Par Pharmaceuticals (NYSE: PRX), now says that it's interested in acquisitions in Eastern Europe, Russia, and perhaps some other markets. Another acquisition would certainly help it compete against the much larger Mylan (NYSE: MYL) and Teva Pharmaceuticals (Nasdaq: TEVA).

Dr. Reddy's is continuing to expand its base of products. It launched its first over-the-counter product -- a generic version of GlaxoSmithKline's (NYSE: GSK) Zantac -- in September. We should get a better look at how the expansion into OTC is going next quarter. The company is building a new R&D facility dedicated to biologics, continuing on its quest to expand its follow-on biologics products in anticipation of Congress establishing a pathway to approval. Add to that 69 Abbreviated New Drug Applications pending with the FDA and Dr. Reddy's future looks pretty good, even without another bonus in the form of authorized generics.