Is 2007 going to be another record year for generic drug sales and profits? Hard to say, but at least Dr. Reddy's Laboratories (NYSE:RDY) got the year off to a good start for the industry with yesterday's earnings release.
Sales increased 160% year-over-year in the third quarter to $350 million, and earnings jumped 200% to $43 million. The biggest growth in revenue came from Reddy's North American and European business segments, where new introductions of generic drugs provided a big boost.
Boo on Dr. Reddy's for not including a statement of cash flow with its earnings release! Still (from the limited balance sheet information that was provided), it seems that the company's cash position has nearly doubled to $390 million. Its debt declined to $630 million, although mostly as a result of dilutive financing.
Gross margins came in at 44% for the third quarter, which is expected and isn't anything spectacular for a drug developer selling lower-priced generics. Net margins were a solid 12%, as Reddy is doing a better job this quarter of keeping its operating expenses down.
As sales scale upward, operating expenses will hopefully become an even smaller portion of overall sales. For example, Reddy's generic drug competitors, like Mylan Laboratories (NYSE:MYL) and Watson Pharmaceuticals (NYSE:WPI), had SG&A expenses that comprised 14% and 15% of sales. Reddy's SG&A expenses, on the other hand, were at 23% this quarter, but down from 34% last year.
The lifeblood of any generic drugmaker is launching new generics onto the market. In the most recent quarter, Reddy received FDA approval to market four more drugs, and is awaiting regulatory review on 58 others. Compared to its peers, this is not an especially high amount of new products entering the market, but Reddy does have another five months of partial marketing exclusivity on a generic version of GlaxoSmithKline's (NYSE:GSK) Zofran, so next quarter's sales will see a spike as well. Investors looking to hedge a pharmaceutical position in case of adverse congressional legislation (or those looking for an international company in booming India) might do well to look at Dr. Reddy's.
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Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.
