Dr Reddy’s US earnings to get a boost, but valuations are pricey
Dr Reddy’s Laboratories Ltd’s settlement with Celgene, a subsidiary of Bristol Meyers Squibb, regarding the Revlimid patent will open up opportunities in the US market, post-FY23.
Dr Reddy’s Laboratories Ltd’s settlement with Celgene, a subsidiary of Bristol Meyers Squibb, regarding 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 about $8 billion sales, the company will be allowed limited volumes after March 2022, and unlimited quantities after January 2026. While several other pharmaceuticals 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.
“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," noted analysts at Kotak Institutional Equities in a client note.
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 in a client note.
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," said analysts at Kotak Institutional Equities in a client note.
Watch our Stock Market Target Calls Quality, Track sheet – Click Here or Subscribe us for Stock Market Trading >>>> Stock Cash Tips