Home / Market / Mark-to-market /  Dr Reddy’s gets a Suboxone boost

Good news is somewhat of a rarity when it comes to Indian pharmaceutical companies and the US generics market. Investors were pleasantly surprised when Dr Reddy’s Laboratories Ltd won a case, allowing it to continue selling a generic version of Suboxone, a drug used to treat opioid addiction.

For Indivior Plc, which holds patent over the drug, the bulk of its $768 million revenue in the nine months of 2018 came from sales of Suboxone, said Bloomberg.

Dr Reddy’s launch will see it gain share at the expense of Indivior, and this drug was expected to be a key contributor to revenues. Unless there are any further legal obstacles, the Indian company should be in a position to bring the product back on the market.

It is still an at-risk launch, meaning there is ongoing patent litigation, but the drug maker has chosen to go ahead and launch based on its confidence of winning the case.

The legal victory means Dr Reddy’s will start generating revenues from generic Suboxone earlier than expected. Jefferies India Pvt. Ltd estimates that the launch can add 12% to Dr Reddy’s FY19 earnings but the FY20 earnings estimates have been left unchanged as the product was expected to be launched in that year anyway. Along with Dr Reddy’s, there will be other generic competitors in the fray, though their entry will be staggered and still in limited numbers.

This development should give a much-needed boost to Dr Reddy’s US business. Sales during the September quarter declined by 0.4% over a year ago and its base business declined by 5%, according to Jefferies India. The company had launched four new products during the quarter. It said that the sequential decline in sales was chiefly due to lack of sales from generic Suboxone and price erosion in some key products that were partially offset by a favourable forex situation.

Dr Reddy’s shares rose by 5.9% on this news on Wednesday and then settled down on Thursday. That in some way reflects accurately the mood among investors. While this event will give a one-time boost, the rest of it was anyway factored in its valuations.

This done, the bigger picture is Dr Reddy’s ability to get US business growth going, by launching a few more key products from its pipeline.

Then, there’s the regulatory overhang that is worrying the market. Recent news that the company got eight observations for its Duvvada plant (near Visakhapatnam), five of which were repeat observations, is certainly not the kind investors want to hear. It reflects an inability to take adequate remedial action on an observation, which reflects rather poorly on the company.

Dr Reddy’s shares still reflect optimism on the part of investors, trading at 20 times the FY20 mean of analyst estimates compiled by Reuters. Hopefully, it can still get through the hurdles in its path to deliver on those expectations

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