Why Dr. Reddy’s Share Fell to a 52-Week Low: The Bigger Problem Behind Q1 FY27 Results

Dr. Reddy’s Laboratories shares fell sharply after the company announced its Q1 FY27 results. The stock tumbled as much as around 7% during the session and touched a fresh 52-week low. It later recovered most of the losses and was trading around 2% lower at the time of writing.

The immediate trigger was a 69% decline in quarterly profit. But the market reaction was not only about one weak quarter or a ₹240 crore provision.

Dr. Reddy’s is currently going through an important business transition. The company’s older high-margin product, lenalidomide, is declining. At the same time, semaglutide, which was expected to become an important new growth driver, has faced a manufacturing delay.

To understand why this matters, we first need to understand how Dr. Reddy’s makes money.

What Does Dr. Reddy’s Laboratories Do?

Dr. Reddy’s is an integrated pharmaceutical company. This means it participates in different stages of the medicine manufacturing process.

The company manufactures active pharmaceutical ingredients, or APIs, which are the main substances that make a medicine work. It also converts these ingredients into finished medicines such as tablets, capsules, liquids and injections.

Dr. Reddy’s then sells these medicines across India, North America, Europe and several emerging markets.

The company reports its business under two main segments.

The Global Generics business is therefore the main earnings engine. It includes medicines sold across North America, India, Europe and emerging markets.

PSAI stands for Pharmaceutical Services and Active Ingredients. Under this business, Dr. Reddy’s manufactures drug ingredients for its own products as well as for other pharmaceutical companies. It also provides development and manufacturing services to global drugmakers.

How Does a Generic Pharmaceutical Company Make Money?

When a pharmaceutical company develops a new medicine, it normally receives patent protection. During this period, other companies cannot sell a direct generic version of the medicine.

After the patent or exclusivity ends, generic companies such as Dr. Reddy’s can launch lower-cost versions.

However, not every generic drug has the same economics.

Simple generic medicines can attract several competitors. As more companies enter, prices decline and margins come under pressure. A generic company therefore needs to keep launching new products just to offset the price erosion in older products.

Complex generics are different. These can include difficult-to-manufacture injections, inhalers, peptides and biosimilars. Fewer companies may be able to develop and manufacture them successfully.

Limited competition can allow the early entrants to earn much higher revenue and margins. But these profits are rarely permanent. Once more competitors enter, pricing and profitability usually decline.

This distinction is important because Dr. Reddy’s recent profits were supported by one such limited-competition product: lenalidomide.

Why Was Lenalidomide Important for Dr. Reddy’s?

Lenalidomide is a generic version of Revlimid, a medicine used mainly to treat multiple myeloma, a type of blood cancer.

Dr. Reddy’s had reached a patent settlement with Revlimid’s manufacturer, which allowed it to sell limited quantities of generic lenalidomide in the US. Because competition was restricted, the product generated significantly better revenue and margins than a normal generic medicine.

This supported Dr. Reddy’s North American business and lifted its consolidated profitability.

However, this opportunity was temporary. Competition and pricing pressure increased, while Dr. Reddy’s permitted sales opportunity moved towards its end.

The impact was clearly visible in Q1 FY27.

North America revenue declined 35% year-on-year to ₹2,205 crore. This was despite Dr. Reddy’s underlying US business, excluding lenalidomide, growing at a double-digit rate.

In other words, the base business continued to grow, but the growth was not large enough to replace the revenue and profit lost from lenalidomide.

Why Was Semaglutide Expected to Fill This Gap?

Semaglutide is used in medicines for diabetes and weight management. The medicine belongs to the GLP-1 category, which has seen strong global demand.

Dr. Reddy’s became the first company to receive approval and launch a generic semaglutide injection for Type 2 diabetes in Canada. It also launched generic semaglutide tablets in India.

Semaglutide was important for Dr. Reddy’s for two reasons.

First, it was expected to become a meaningful new revenue opportunity. Second, semaglutide is a peptide product that is more difficult to manufacture than a simple tablet. This created the possibility of lower competition and better margins during the early part of the opportunity.

Therefore, semaglutide was not just another product launch. It was expected to become part of the bridge between the declining lenalidomide business and Dr. Reddy’s next phase of growth.

That bridge has now been delayed.

What Went Wrong With Semaglutide?

Dr. Reddy’s was increasing its semaglutide API manufacturing capacity to meet demand. During this scale-up process, an impurity was found to be outside the required specifications when the API was converted into the finished injection.

The company stopped commercial supplies while it investigated and corrected the manufacturing process.

Dr. Reddy’s clarified that the issue was related to new scale-up batches. It said there was no impact on medicines already supplied to the market, patient safety or existing regulatory filings.

The financial impact in Q1 FY27 was ₹240 crore. This included an inventory provision and other associated costs.

Management expects the new validation process to be completed around September. If successful, commercial API supply could restart in October, with finished products reaching the market by late October or early November.

Dr. Reddy’s now expects to supply around 6 million to 7 million semaglutide pens between November 2026 and March 2027. However, management also acknowledged that there remains a risk of a further delay if the new validation process is unsuccessful.

The company has an alternative API source, but adding it to the injectable product could take around a year because it would require regulatory approval. This means the alternative cannot solve the immediate supply problem.

How Weak Were Dr. Reddy’s Q1 FY27 Results?

The sharp fall in profit was partly caused by the ₹240 crore semaglutide provision. But excluding this impact does not make the quarter particularly strong.

Without the semaglutide-related impact, Dr. Reddy’s EBITDA margin would have been 15.4% instead of 12.5%. That was still significantly below the 26.7% margin reported in Q1 FY26.

Similarly, the adjusted gross margin would have been 49.4%, compared with 56.9% in the same quarter last year.

This tells us that semaglutide was not the only problem.

The larger issue was the loss of the high-margin lenalidomide contribution. Higher solvent and freight expenses caused by the Middle East conflict also affected profitability.

Why Did the Stock Fall Despite Growth in Other Markets?

Dr. Reddy’s performance outside North America was healthy.

India growth was supported by new brands, acquired products, price increases and higher volumes. Emerging markets benefited from new launches and favourable currency movements. Europe also grew due to new generic launches and currency benefits.

Branded businesses across India, emerging markets and nicotine replacement products accounted for 52% of consolidated revenue. The company also maintained a net cash surplus of ₹3,058 crore.

The problem is that revenue growth and profit growth are not the same.

The growing Indian and emerging-market businesses may provide more stable and diversified revenue. However, they are currently unable to generate the same profit contribution that limited-competition lenalidomide generated in the US.

This is why consolidated revenue declined by only 6%, but EBITDA fell 56% and net profit declined 69%.

Is the Problem Temporary or Structural?

Part of the weakness is temporary.

The ₹240 crore semaglutide provision may not repeat once the manufacturing issue is resolved. Freight and solvent costs could also normalise if geopolitical conditions improve.

But some of the pressure is structural.

Lenalidomide revenue is declining and is unlikely to return to its earlier level. Dr. Reddy’s therefore needs its base business and new complex products to generate enough growth to replace the lost profits.

Semaglutide can potentially become one of these products. Other products such as bosutinib, abatacept, biosimilars and innovative medicines could also contribute over time.

However, these opportunities involve regulatory, manufacturing and execution risks. For example, Dr. Reddy’s biologics facility at Bachupally received a US FDA Form 483 with seven observations after an inspection. The company said it responded within the required timeline.

The next phase of growth will therefore depend not only on product approvals but also on Dr. Reddy’s ability to manufacture these products reliably and launch them on time.

What Should Investors Track Next?

The first major factor is whether Dr. Reddy’s completes the semaglutide validation process by September and resumes supplies by November.

The second is whether the company can deliver the expected 6 million to 7 million pens during the remaining part of FY27. Further delays could reduce revenue and allow competitors to gain market share.

The third is margin recovery. Even after excluding semaglutide costs, the Q1 EBITDA margin was only 15.4%. Investors will need to see whether the base business can move profitability closer to management’s longer-term expectations.

The fourth is the performance of the North American business without lenalidomide. Six new products were launched in the US during Q1, and the company had 76 abbreviated new drug applications awaiting approval. The quality and profitability of these launches will be more important than the number of launches alone.

Finally, investors should track progress in complex generics, peptides and biosimilars. These products are expected to become the next high-value layer of Dr. Reddy’s business.

Author’s Take

Dr. Reddy’s core business is not collapsing. India, Europe and emerging markets continue to grow, while the underlying North American business excluding lenalidomide also reported double-digit growth.

However, the company has an earnings replacement problem.

Lenalidomide created unusually high revenue and margins, but that opportunity is fading. Semaglutide was expected to help replace part of this contribution, but the manufacturing delay has pushed back the new growth engine precisely when the older one is declining.

The stock’s fall therefore reflects more than a ₹240 crore one-time provision. It reflects weaker earnings visibility during the transition from lenalidomide to semaglutide and other complex products.

Until semaglutide supplies resume and margins begin to recover, the market may continue to question how quickly Dr. Reddy’s can rebuild the profitability it earned during the lenalidomide period.