Two very different businesses under one label

“Indian pharma” covers businesses that behave almost nothing alike. The two that matter most for this lens:

  • US generics. Copies of drugs whose patents have expired, sold in the US at a fraction of the original price. The first few companies to launch a generic can earn a lot on it; as more competitors arrive, the price falls — often steeply — and keeps falling. So a US generics business has to keep launching new products just to stand still, and one or two products with little competition can be a large, temporary share of profit.
  • Branded generics in India and other emerging markets. Off-patent medicines sold under the company’s own brand names, largely through doctors’ prescriptions. Growth comes from brands, field sales forces and new launches; prices are steadier than in US generics.

Both depend on research and development (R&D) to file new products, and on plants that regulators approve. So the sector lens adds three things to the usual ratios: where the revenue comes from, how much goes into R&D, and what the US Food and Drug Administration (USFDA) has found at the plants.

The formulas

R&D intensity     =  R&D expense  /  revenue

Segment share     =  segment revenue  /  total revenue

Gross margin      =  (revenue − cost of revenue)  /  revenue
                     (moves with the MIX of what's sold, not just efficiency)

R&D intensity is simple arithmetic. The judgement is in what the R&D is buying, which no ratio tells you.

Worked example: Dr. Reddy’s, FY26

From Dr. Reddy’s FY26 results press release (consolidated, IFRS — International Financial Reporting Standards), released 12 May 2026 and filed with the US SEC (Securities and Exchange Commission). The release reports in ₹ million; shown here in ₹ crore (₹10 million = ₹1 crore). Historical, for illustration only.

Step 1: where the revenue came from

Segment FY26, ₹ crore FY25, ₹ crore Share FY26 Share FY25 Growth
North America 11,374 14,516 33.9% 44.6% −22%
Europe (incl. acquired NRT business) 5,550 3,588 16.5% 11% 55%
India 6,219 5,373 18.5% 16.5% 16%
Emerging markets 6,761 5,477 20.1% 16.8% 23%
PSAI (active ingredients and services) 3,477 3,385 10.4% 10.4% 3%
Others 213 214 0.6% 0.7% 0%
Total 33,593 32,554     3.2%

(North America, Europe, India and emerging markets together form the company’s Global Generics segment. Shares may not add to exactly 100% because of rounding.)

  1. The headline was revenue up 3.2%.
  2. Underneath, North America fell 21.6% — about ₹3,143 crore — and its share of revenue dropped from 44.6% to 33.9%. Everything else together grew by about ₹4,182 crore, more than making up the gap.
  3. Why, in the company’s words: the North America decline “was largely due to lower Lenalidomide sales and the one-time SSA”. Lenalidomide is one generic product. The SSA — shelf-stock adjustment — is a credit a generics maker gives US wholesalers when a product’s price falls, to cover the value lost on stock they already hold. It was ₹453 crore in the March quarter, when North America revenue was ₹1,756 crore against ₹3,559 crore a year earlier.
  4. Europe’s 55% includes a consumer-health business (nicotine replacement therapy, NRT) acquired during FY25; excluding it, the release puts Europe’s growth at 14%. Not like-for-like.

Step 2: what the mix did to margins

FY26 FY25
Gross margin 52.8% 58.5%
EBITDA margin (earnings before interest, tax, depreciation and amortisation) 22.8% 28.3%
R&D, ₹ crore 2,406 2,738
R&D intensity 7.2% 8.4%
Profit attributable to shareholders, ₹ crore 4,285 5,654
  1. Revenue rose 3.2% but gross margin fell from 58.5% to 52.8% and profit fell 24.2%. For the lower gross margin, the release names “reduced sales of Lenalidomide, price erosion in North America and Europe Generics and a one-time SSA impact”. That’s the mix effect in action: when high-margin sales shrink and revenue is made up elsewhere at lower margins, the top line holds while the margin drops.
  2. R&D intensity fell from 8.4% to 7.2%, and R&D spending fell 12.1% in rupees. The release attributes this to lower spending on biosimilars (copies of biological drugs) after most of one programme’s investment was completed. A falling ratio can mean discipline or under-investment; the ratio can’t tell you which.
  3. The pipeline is where R&D shows up. At 31 March 2026 the company had 75 ANDAs (abbreviated new drug applications — the US filing to sell a generic) pending with the USFDA, 43 of them “Paragraph IV” filings that challenge an existing patent, and 15 new ANDAs filed during FY26. A first filer on a patent challenge can win a period of US market exclusivity, which is why companies report how many filings “may have ‘First to File’ status” (22 here).

Step 3: USFDA inspections — the mechanism

A plant that makes medicines for the US has to pass USFDA inspections. At the end of an inspection, observations may be written up on a Form FDA 483. The USFDA then gives the inspection a final classification, which it publishes in its inspections data dashboard:

Classification What it broadly means
NAI — No Action Indicated No objectionable conditions requiring action
VAI — Voluntary Action Indicated Objectionable conditions found, but the company is left to correct them; no regulatory action recommended
OAI — Official Action Indicated Regulatory action recommended

Why investors watch this: an OAI outcome can lead to a warning letter, and new product approvals that depend on that plant can be delayed until it’s resolved. For a company whose growth depends on US launches, one plant’s status can matter more than a quarter’s profit.

  1. Dr. Reddy’s release for the year reports that a formulations plant at Srikakulam, Andhra Pradesh, received a VAI classification after a USFDA inspection (including a pre-approval inspection) in December 2025. Classifications apply per plant and per inspection; they’re a snapshot, not a permanent grade.

None of this is a view on Dr. Reddy’s. It’s one year’s release, read through the sector’s metrics.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

Imagine you’re the first kid in school to sell a copy of a popular sticker, the day the original company stops being the only seller. For a while you can charge almost what they did. Then ten other kids start selling the same sticker, and the price drops to almost nothing.

So you keep looking for the next sticker to copy — that’s R&D. And a teacher checks everyone’s sticker-making desk to make sure it’s clean and safe — that’s the USFDA inspection. If your desk fails, you’re not allowed to sell new stickers until you fix it.

Common mistakes

  • Treating one product’s windfall as the base business. In US generics, a product with little competition can be a big share of profit for a year or two and then fade. When one product drives a year’s growth, ask what the business looks like without it — Dr. Reddy’s own release shows a year where the rest of the business grew while North America shrank.
  • Reading R&D intensity as a quality score. A higher ratio isn’t automatically better, and a falling one isn’t automatically worse. What matters is what it buys — filings, approvals, launches — and that shows up years later.
  • Ignoring price erosion. US generic prices tend to fall year after year. Revenue growth that relies only on existing products is fighting that tide; new launches are what offsets it.
  • Treating an inspection result as permanent. USFDA classifications apply to a plant and an inspection. A clean result can be followed by a bad one, and the reverse, so track the status plant by plant.

Takeaway: For a pharma company, look past total revenue to where it comes from: US generics can shrink fast when competition arrives, even as branded businesses elsewhere grow. Read R&D intensity as spending, not quality, and track USFDA outcomes plant by plant.