Can Dr. Reddy’s PSAI business quietly power its next phase of global pharmaceutical growth?

Dr. Reddy’s Laboratories Ltd (NSE: DRREDDY, NYSE: RDY) is increasingly drawing attention to a business segment that has historically operated in the background: its Pharmaceutical Services and Active Ingredients (PSAI) division. With Q4 FY25 PSAI revenue reaching ₹956 crore—marking 16% year-on-year growth—and full-year PSAI revenue crossing ₹3,384 crore, the Hyderabad-based pharmaceutical exporter is positioning its API and CDMO capabilities as a key pillar of global expansion. While investor focus often gravitates toward the generics and biosimilars business, the PSAI segment is quietly laying the foundation for margin stability, backward integration, and contract manufacturing scale.

Analysts believe that as global pharma clients diversify supply chains and lean into cost-effective development services, Dr. Reddy’s Laboratories Ltd could emerge as a serious competitor in the API and custom manufacturing arena.

What does Dr. Reddy’s PSAI business include and how is it structured across API and CDMO operations?

The Pharmaceutical Services and Active Ingredients division of Dr. Reddy’s Laboratories Ltd comprises two interlinked verticals: active pharmaceutical ingredient (API) manufacturing and contract development and manufacturing organization (CDMO) services. The Indian pharmaceutical exporter supplies more than 150 APIs globally—many of which are used internally across its own generics and biosimilars portfolios—while simultaneously selling APIs to external clients in the U.S., EU, Japan, and Latin America.

On the CDMO side, the Hyderabad-based drugmaker provides end-to-end services that span early-stage custom synthesis, scale-up support, regulatory filing assistance, and commercial supply partnerships. This structure enables dual revenue streams: (1) volume-based API exports and (2) value-based CDMO contracts, both of which leverage Dr. Reddy’s vertically integrated manufacturing assets across India and emerging economies.

How did the PSAI segment perform in Q4 FY25 and what were the key drivers behind its revenue momentum?

For the quarter ended March 31, 2025, Dr. Reddy’s Laboratories Ltd reported ₹956 crore in PSAI revenue, representing a 16% year-on-year growth compared to Q4 FY24. This momentum was underpinned by higher demand for regulated-market APIs, multiple new launches, and increased traction in the custom development business. Management attributed the performance to improved capacity utilization, ongoing client diversification, and a rising number of commercial-scale projects under CDMO contracts.

For the full year FY25, PSAI revenue totaled ₹3,384 crore, up approximately 14% from ₹2,960 crore in FY24. The segment accounted for nearly 10% of Dr. Reddy’s consolidated revenue in FY25. Analysts noted that despite operating in a lower-margin segment relative to formulations, PSAI’s consistent double-digit growth enhances cash flow resilience and supports fixed-cost absorption across the broader supply chain.

What role does the PSAI division play in enabling Dr. Reddy’s vertical integration and competitive manufacturing strategy?

The PSAI division is a cornerstone of Dr. Reddy’s Laboratories Ltd’s vertically integrated operating model. By manufacturing critical APIs in-house, the Hyderabad-based pharmaceutical manufacturer reduces dependence on third-party suppliers and mitigates raw material price fluctuations. This integration also ensures quality control, shortens development timelines, and lowers the cost of goods sold across the generics and biosimilars business lines.

Moreover, excess API capacity is monetized through external sales to generic drugmakers and Big Pharma clients worldwide. This dual-use strategy transforms manufacturing assets from cost centers into revenue generators, enabling better fixed-asset leverage and strategic flexibility. In an industry increasingly focused on cost-efficiency and supply chain security, PSAI provides a structural edge that differentiates Dr. Reddy’s from pure-play CDMO competitors and traditional API exporters.

How is Dr. Reddy’s positioned in the global API export and pharmaceutical CDMO landscape in 2025?

Dr. Reddy’s Laboratories Ltd remains one of India’s top five API exporters by volume and regulatory footprint. Its PSAI portfolio includes high-value APIs such as lenalidomide, naproxen, atorvastatin, and olanzapine, among others—many of which are supported by U.S. Drug Master Files (DMFs) and EU Certificates of Suitability. As of Q4 FY25, the Indian pharmaceutical manufacturer had filed over 70 cumulative U.S. DMFs and over 150 filings globally, underscoring its strong presence in regulated markets.

Within the CDMO landscape, Dr. Reddy’s is emerging as a mid-sized partner of choice for small- and mid-cap biotechs seeking India-based development and scale-up services. Its ability to execute on both generics-linked APIs and complex oncology and CNS molecules allows it to tap into niche outsourcing contracts. While it remains behind global CDMO leaders like Lonza or WuXi, its low-cost model and end-to-end development support provide a compelling value proposition for emerging-market drug developers.

What are the margin dynamics, regulatory strengths, and supply chain factors influencing PSAI performance?

PSAI typically operates at a lower gross margin than the Global Generics or Proprietary Products segments—historically in the range of 26–28%. However, its EBITDA margins have steadily improved due to operational efficiency, backward integration, and economies of scale. In Q4 FY25, PSAI margins tracked close to 27%, aided by increased plant utilization and stable pricing in key molecules.

The Hyderabad-based API manufacturer maintains multiple U.S. FDA, EU GMP, and Japanese PMDA-approved facilities, ensuring that it can serve the most stringently regulated markets. This compliance profile is increasingly important as global buyers reduce exposure to Chinese-only supply sources. Dr. Reddy’s ability to meet global regulatory standards while offering cost-competitive manufacturing has become a central strength in its PSAI growth story.

How are institutional investors and analysts interpreting PSAI’s contribution to Dr. Reddy’s overall stock narrative?

Institutional investors have historically underweighted the PSAI segment in their valuation models, focusing instead on formulation-led growth in the U.S. and India. However, the sustained revenue uptick and visibility into forward CDMO contracts are shifting sentiment. Analysts note that PSAI brings diversification and margin stability at a time when generic pricing pressure remains a concern.

Investor sentiment is also being shaped by broader macro trends, including API reshoring efforts in the U.S. and EU, supply chain de-risking, and incentives for Indian API manufacturing under production-linked incentive (PLI) schemes. For long-term holders, PSAI represents a reliable contributor to free cash flows and a potential upside lever if the CDMO business scales beyond small-volume contracts.

What would long-term success look like for the PSAI segment and how might it influence Dr. Reddy’s growth trajectory beyond FY26?

Success in the PSAI division by FY26 would likely include continued double-digit revenue growth, higher utilization of API and CDMO assets, and increased global market share in both commercial APIs and custom manufacturing contracts. Analysts forecast that if Dr. Reddy’s expands CDMO services into high-potency APIs, antibody-drug conjugates (ADCs), or sterile injectables, the segment could grow to contribute 12–15% of total revenue by FY27.

This would also improve blended gross margins and strengthen the enterprise’s valuation multiple—potentially repositioning Dr. Reddy’s Laboratories Ltd not just as a top Indian generics player, but as a vertically integrated pharma solutions provider with defensible global cost leadership and development capabilities.