The Doctor Is on a Roller Coaster

What goes up must come down. Unfortunately, in the world of generic drugs, the laws of physics sometimes extend to sales growth. Last year, Dr. Reddy's Laboratories (NYSE:RDY) sported a quarterly loss of $5 million. This year, it has just experienced one of its best quarters ever, with a profit of $75 million. What's in store for next year? Well, let's just remember Newton's Law.

The 125% year-over-year increase in quarterly sales was mainly due to the German pharmaceutical company Betapharm, which Dr. Reddy's acquired in 2006. Sales of the generic version of GlaxoSmithKline's (NYSE:GSK) antinausea tablet Zofran also helped with increased sales, since this quarter included most of the 180-day exclusivity period during which the generic product had no competition.

While the new product lines increased revenues, existing products in the three main phases of its business -- active pharmaceuticals ingredients, branded formulations, and generic drugs -- also saw sales increases. Excluding the authorized generics and acquisitions, Dr. Reddy's revenues were still up 58% over the last fiscal year.

In the competitive market of generic drugs, keeping costs down is the only way to survive. For the quarter, gross margins were up substantially to 63%, from 42% last year, but that was helped out by the exclusive sales of its new generic drugs. For the fiscal year, gross margins were an unimpressive 47%, which may dip again as exclusive sales periods end.

The thing I like best about Dr. Reddy's management is that it's forthright about the upcoming loss in sales. Management didn't give earnings guidance for the year ahead, but it did point out that many of this quarter's increases were due to one-time events that won't likely be repeated. After all, the moat for generic drugmakers is short lived.

This quarter marks the end of the fiscal year for Dr. Reddy's, so investors should keep an eye out for the annual report. It should give a more complete picture of the road ahead.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any companies mentioned in this article. He blogs about start-up biotech companies at Babybiotechs.com. The Fool has an ironclad disclosure policy.