Dr. Reddy's Rough Quarter

Dr. Reddy's Laboratories (NYSE: RDY) took separate hits to its top and bottom lines in its fiscal third quarter, but most of the damage seems to be done.

Revenues dropped 20% year over year, largely because the most recent quarter was being compared to a whopper of a quarter. The year-ago quarter included revenues from authorized generics, as well as from exclusive marketing of its generic version of GlaxoSmithKline's (NYSE: GSK) Zofran. Excluding the upside from last year, revenues grew 8%.

Dr. Reddy's bottom-line problems came because it's exposed to the turmoil in Germany's generic-drug market by way of its 2006 purchase of Betapharm. Price cuts and a shakeup in suppliers to the insurance companies forced Dr. Reddy's to take a $60 million charge in the quarter.

With further price cuts expected in April, the generic-drug maker is scrambling to make the best of the situation. It is moving manufacturing back to its home base in India, which will help with gross margins. By March, the company expects to have 60% of the products (by volume) being shipped to Germany. By summer, that should be up to 80%.

In the U.S., Dr. Reddy is making a push into the over-the-counter (OTC) generic-drug market. This month, it launched a generic version of Pfizer's (NYSE: PFE) Zyrtec, which recently went off patent and got OTC status, thus causing the drug to switch hands to Johnson & Johnson (NYSE: JNJ). The generic OTC market is going to be fairly crowded, but I like Dr. Reddy's decision to move ahead. With the additional drugs it's planning to launch this quarter, Dr. Reddy's will have a nice portfolio of OTC drugs -- especially considering that it just started selling OTC drugs in the U.S. last September.

While the worst might be behind Dr. Reddy's, don't expect to see the company move back toward double-digit growth too soon. The fact that the company is touting its launch of a generic version of Glaxo's Imitrex four quarters from now makes me think that my pick for an attractive bargain stock is going to take awhile to turn around.

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