Dr. Reddy's Laboratories (NYSE:RDY) may be one of the best medical stocks you haven't heard of. The pharmaceutical company concentrates on generic and biosimilar medicines for cardiovascular disease, pain management, oncology, gastrointestinal ailments, dermatology, anti-infection treatments, and pediatrics. Though it is the third-largest pharmaceutical company in India, most of its sales (39%) are in North America.

The company's stock is down slightly this year (1.42%), but up more than 35% over the past 12 months, and trends are working in the company's favor. India is the world's largest exporter of generic medicines, responsible for 20% of the world's generic exports, according to Indian Chemical News. There's plenty of growth potential within the country as well, with India expected to surpass China as the most populous nation in the world by 2027.

Pharmaceutical factory worker wearing full protective gear holds red pills in hand over a larger bowl.

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A strong balance sheet gives cause for optimism

Dr. Reddy's showed positive gains in the most important financial data, according to its annual report. Revenue for 2020 was listed as $23.7 billion, up 13% over 2019. Gross profit was $1.27 billion, again up 13% year over year. EBITDA was up to $626.8 million, a rise of 36% over 2019. Pharmaceutical companies that specialize in generics have lower margins than other pharmaceutical companies, but Dr. Reddy's has improved its margins over the past two years.

That growth continued in the first quarter with reported revenue of $585 million, up 15% year over year, and gross profit of $328 million, up 25% over the same period in 2020. EBITDA for the quarter was $154 million, up from $150 million in 2020.

Its sales actually declined in India, but that was more than offset with increased sales in Europe, the United States, and emerging markets. Last year was a strong year with 101 generic filings pending for approval with the U.S. Food and Drug Administration (FDA) as of June 2020.

The company also improved its profit margin to 56% in the first quarter, up 4.3% year over year and 4.5% sequentially.

Dr. Reddy's also raised its annual dividend 25% last year to $0.3334 a share. While the yield is only 0.47%, the company has consistently given out a dividend every year since 1996.

TEVA Gross Profit Margin Chart

TEVA Gross Profit Margin data by YCharts

A promising pipeline

Some of the company's biggest generic brands include Omez, an antiulcer and heartburn medication, pain reliever Nise, and Stamlo, a calcium channel blocker.

The company's most recent launch in the U.S. is for albendazole, the generic version of the antiworm medication, Albenza, sold by GlaxoSmithKline. According to a study by MarketsandResearch.biz, the albendazole market should grow with an 8% compound annual growth rate through 2025, reaching $188.4 million.

It also came to terms last September on an agreement with Bristol-Myers Squibb that, starting in 2022, allows Dr. Reddy's to produce a limited supply of the generic form of Revlimid, a multiple myeloma drug that had $12.1 billion in sales last year.

Dr. Reddy's has also focused more on biosimilars. It produced the first approved biosimilar, filgrastim, a protein that helps in the production of white blood cells, in India. It also had the world's first biosimilars for MAb (Rituximab), used as a therapy for certain cancers and autoimmune diseases, and for darbepoetin alfa, a protein that helps fight anemia by helping create red blood cells.

Branching out to fill a need

India has been dealing with a mounting COVID-19 threat, with more than 20 million cases of the virus, second only to the United States, and more than 222,000 deaths from COVID-19, third behind the U.S. and Brazil. Dr. Reddy's is in the process of becoming India's third maker of a COVID-19 vaccine as it was granted emergency use approval in April to distribute the Russian Sputnik V vaccine.

The move to distribute the vaccine is a big step for Dr. Reddy's, which has not been that active in vaccines. It received the first batch last week and said it should have approval to distribute the vaccine in a few weeks.

Making the choice easy

Dr. Reddy's appears to be on the upswing and a good choice for healthcare investors. Over the past three years, it has increased revenue 21% and its profit margin 20%. Because it is in India, it has lower production and labor costs than other big generic competitors, dwarfing the margins of companies such as Teva Pharmaceuticals and Lannett. If Dr. Reddy's can make greater inroads in its own country as well as it has in the United States, there's massive potential for share price growth.

The company's slip in share price the past three months, to me, makes it a more attractive buy with a forward price-to-earnings (P/E) ratio of 24, which is low compared to the 34 forward P/E ratio of most pharmaceutical companies.

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