Dr Reddy’s Laboratories is navigating a critical transition phase as legacy gains from gRevlimid taper off, even as the company lays the groundwork for its next multi-year growth cycle. ICICI Direct has reiterated a BUY call on the stock, citing visible medium-term opportunities in GLP-1 therapies, biosimilars, and innovative products across global markets. While Q3FY26 earnings reflected margin pressure and US pricing headwinds, the underlying operational performance outside the US remained resilient. Management’s strategic pivot toward complex launches and branded portfolios positions the company for earnings recovery over FY27–FY28, underpinning ICICI Direct’s target price of Rs 1490.

Research House View: ICICI Direct Maintains BUY with Rs 1490 Target

ICICI Direct has maintained its BUY recommendation on Dr Reddy’s Laboratories, setting a 12-month target price of Rs 1490, implying a potential upside of about 22% from the current market price of Rs 1220. The valuation is based on 22x FY28E EPS of Rs 67.6, reflecting confidence in the company’s post-Revlimid growth strategy and improving earnings visibility

Global Business Model Anchored in Diversification and Scale

Dr Reddy’s operates a geographically diversified pharmaceutical franchise spanning the US, Europe, India, Russia/CIS, and other emerging markets. The company’s business model integrates generics, branded generics, APIs, biosimilars, and innovative therapies, supported by a global manufacturing and R&D footprint.

Revenue contribution in Q3FY26 was well spread, with the US accounting for about 34%, India 18%, Russia and CIS 15%, Europe 8%, RoW 7%, PSAI 9%, and the nicotine replacement therapy (NRT) portfolio contributing the balance. The company runs 14 formulation facilities, 9 API plants, and a dedicated biologics facility, providing scale advantages and execution flexibility.

Q3FY26 Earnings: Operationally Stable, Financially Pressured

Q3FY26 revenues rose 4.4% year-on-year to Rs 8753.4 crore, driven by strong performances across most geographies outside the US. Europe grew nearly 19% year-on-year to Rs 1447.6 crore, aided by a sharp rise in NRT portfolio sales. India revenues expanded 19% to Rs 1603.2 crore, while Russia and CIS surged 38% to Rs 1300 crore, supported by new launches and favorable currency movements.

However, US revenues declined 12.3% to Rs 2964.4 crore, primarily due to pricing erosion in gRevlimid, which offset gains in the ex-Revlimid portfolio. PSAI revenues also softened marginally during the quarter.

Margin Compression Reflects Waning Revlimid Windfall

EBITDA declined 16% year-on-year to Rs 1914.5 crore, with operating margins contracting sharply to 21.9%, down 528 basis points. The decline was largely attributable to lower gRevlimid contribution and heightened price pressure in select US generics.

Gross margins slipped to 64.6%, while profitability was further impacted by a one-time labor code provision of Rs 117 crore. Net profit fell 15.5% year-on-year to Rs 1190 crore, underscoring the earnings drag from the US business during the quarter.

US Business: Reset Underway, Not a Structural Breakdown

Management emphasized that ex-Revlimid US operations continued to grow during the quarter, suggesting that the headline de-growth does not reflect a systemic erosion of the franchise. Dr Reddy’s will continue selling gRevlimid, albeit without the earlier contractual economics, which explains the sharp margin normalization.

Over the medium term, the US growth narrative will increasingly hinge on biosimilars and specialty launches, rather than traditional generics pricing arbitrage.

GLP-1 and Semaglutide: A Near-Term Growth Catalyst

Semaglutide represents one of the most immediate revenue inflection points for Dr Reddy’s. The company has received DCGI approval and plans to launch semaglutide in India by March 21, 2026. Regulatory responses in Canada are expected by mid-2026, with launches planned across Canada and Brazil over the next few months.

Dr Reddy’s has secured partnered capacity of 12 million pens for FY27, with expected pricing around US$20 per pen, positioning it competitively across emerging and developed markets.

Biosimilars Pipeline: Multi-Year Earnings Visibility

The biosimilars portfolio is shaping up as the company’s core medium-term growth driver. Dr Reddy’s has filed a BLA for Abatacept (IV) in the US, with approval expected by December 2026, and plans to file for Europe by mid-2026. Subcutaneous Abatacept filings are expected shortly thereafter.

For Denosumab, the company has received a complete response letter from the USFDA, with the goal date now pushed to the second half of FY27. Rituximab faces a manufacturing-related regulatory delay, but management expects resolution following re-inspection.

ICICI Direct estimates around US$285 million in biosimilar revenues during FY28, assuming timely approvals and commercialization.

India, Europe, and Emerging Markets Provide Earnings Stability

India continues to deliver double-digit growth, driven by the innovation portfolio, which now contributes 10–15% of domestic sales. Excluding recently acquired brands, base business growth remains strong at about 17%, with management guiding for 15% growth in FY27.

In Europe, the NRT portfolio integration is nearing completion, while emerging markets benefit from new launches and favorable forex trends. Management expects double-digit growth in Russia, adding to geographic diversification.

Financial Outlook and Valuation Framework

ICICI Direct projects revenues to grow from Rs 32,648 crore in FY25 to Rs 40,046 crore in FY28, while EBITDA margins are expected to recover gradually as complex products scale up. EPS is forecast at Rs 67.6 in FY28, supporting the valuation multiple assigned.

The balance sheet remains robust, with low leverage and improving free cash flow yields, providing room for continued R&D investment at 7–8% of revenues.

Stock Levels and Investor Strategy

Current Market Price: Rs 1220
Target Price (12 months): Rs 1490
Upside Potential: ~22%
Investment Horizon: Medium to long term

Investors may consider accumulating the stock on declines, with the understanding that FY26–FY27 represents a transition phase before earnings momentum normalizes.

Key Risks to Monitor

Execution delays in biosimilar approvals, slower-than-expected semaglutide ramp-up, or sustained US pricing pressure could temper upside. Additionally, increasing intangible assets from licensing deals may weigh on near-term return ratios.

Bottom Line: Transition Year Today, Platform for Tomorrow

Dr Reddy’s Laboratories is moving past an extraordinary earnings phase into a more sustainable, innovation-driven growth model. While near-term numbers reflect margin normalization, the strategic roadmap—anchored in GLP-1 therapies, biosimilars, and branded markets—offers credible long-term earnings visibility. ICICI Direct’s BUY call reflects confidence that the company’s complex-product execution will define its next chapter, not the fading legacy of gRevlimid.