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Dr Reddy’s US earnings to get a boost, but valuations are pricey

  • Opportunities in the US market are set to open up with Dr Reddy’s Revlimid patent settlement
  • Favourable rulings in recent past, such as on generic Vascepa, are likely to boost US earnings

Dr Reddy’s Laboratories Ltd’s settlement with Celgene, a subsidiary of Bristol Meyers Squibb, for the Revlimid patent will open up opportunities in the US market, post-FY23. This is yet another big positive for the company after some favourable rulings in the US recently, including on generic Vascepa recently. Shares of Dr Reddy’s jumped 10% on Friday. But with about 22% gains in September, the stock looks like its testing its valuation limits.

While Revlimid is a large product in the US with annual sales of about $8 billion, Dr Reddy’s will be allowed limited volumes after March 2022, and unlimited quantities after January 2026. While several other pharmaceutical companies have launched product applications, Dr Reddy’s should generate sizeable revenue from the product launch initially. With volume caps, price erosion should be limited for new launches post the settlement.

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“Dr Reddy’s settlement is Celgene’s third regarding Revlimid, though the product has eight other filers including Cipla, Sun, Lupin, Aurobindo and Cadila. Assuming no further settlement till FY2027, Dr Reddy’s can generate peak sales of US$400 mn for two to three years in a row from FY2024-26," analysts at Kotak Institutional Equities said in a note to clients.

Nevertheless, investors have also been kept busy with some other favourable rulings in the recent past such as on generic Vascepa. This is also likely to boost US earnings. Lately, Dr Reddy’s signed an agreement with Russia for about 100 million doses of the latter’s Sputnik V vaccine, if trials are successful in India, which is another positive. Also, the company is building up a sizeable formulation business in India, backed lately by the launch of several covid-19-related drugs.

“With limited price erosion in the base business, robust abbreviated new drug launches in the US, greater benefits from cost rationalisation, favourable demand in pharmaceutical services and active ingredients, and synergies from the Wockhardt portfolio, Dr Reddy’s is well-set to deliver a 21% earnings CAGR over FY20–22," said analysts at Motilal Oswal Financial Services.

The Street is pencilling in earnings from Revlimid and other products only now, since there was uncertainty around the litigations earlier. So, that will show a sizeable upgrade in earnings. But all the recent buzz has sent valuations soaring. Even factoring in higher earnings, the stock’s price-earnings multiple has increased to a stiff 26 times FY22 earnings.

Additional patent settlements around Revlimid also cannot be ruled out as there are 10 filings around its generic. “We expect further 3-5 settlements for CY2023-24 launch timelines, thereby capping the upside for Dr Reddy’s. The sharp run-up in the stock captures Revlimid fully," the analysts at Kotak said.

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