Dr Reddy’s shines on favourable patent verdict
Launch of narcotic treatment drug may be sometime away, but it enhances earnings visibility
Drug major Dr Reddy’s Laboratories (DRL) got a breather on Friday as the US District Court of Delaware gave a favourable verdict in the Suboxone patent litigation, a drug used to treat narcotic addiction.
Analysts feel the company would be able to launch the drug in FY19, as the innovator firm may pursue the case in a higher court. The launch can add ~15-30 annually to DRL’s earnings per share (EPS), depending on the pricing strategy by existing players at the time of the launch. The earnings gain is substantial, looking at the drug firm’s EPS of ~78 in FY17. The stock jumped over 10 per cent in intra-day trade before closing at ~2,217.35 on Friday.
Another positive is that the product will see limited competition till 2024. The court ruled that DRL’s generics of Suboxone sublingual film does not infringe the patents of the innovator company, while upholding the existing patents till 2024. Reckitt and Benckiser had developed the Suboxone sublingual films before demerging its pharmaceutical business as Indivior in 2014.
The news comes at a time pricing pressure is hurting DRL’s US sales growth. Also, adequate approvals for launches have not been coming with its facilities in India under the US FDA's scanner. With US sales declining in the June quarter, there have been fresh cuts in analysts’ earnings estimates. But, it is expected that there would be earnings upgrades as clarity emerges on Suboxone’s launch timeline.
The sentiment was further boosted by foreign brokerage CLSA upgrading its rating on DRL to ‘Outperform’ from ‘Sell’ last Thursday following a steep share price correction.
From its peak levels of ~4,375 in November 2015, the stock recently touched a four-year low of ~1,915. The brokerage is bullish on the company’s growth in emerging markets, led by its efforts on biosimilars. DRL has four biologics in India, which contribute about eight per cent to its sales. Internationally, it has launched Reditux, its first biosimilar version of Rituximab used for treating rheumatoid arthritis. The company plans to generate revenue worth $150-200 million from the biologics business in the emerging markets, with a 25 per cent margin (after R&D) by FY20.
Analysts at CLSA expect the revival of launches in the US along with scaling up of biologics in emerging markets to double the company’s earnings over FY17-20.
While near-term pressures may continue, DRL’s long-term prospects are improving. Clearance of its facilities by the US drug regulator will be a major trigger.
Sarabjit Kour Nangra at Angel Broking, however, says after strong gains on Friday, DRL’s stock price is factoring in most part of Suboxone’s launch benefit, though the exact timing of the launch is still not clear.
Long-term investors, though, could use corrections to accumulate the stock.