Sputnik pricing, rising competition weigh on Dr Reddy’s stock

Access to private market and international sales are other factors that will impact margins

The Dr Reddy’s Laboratories stock declined over 4 per cent on Tuesday over the lack of clarity on the pricing of the Sputnik V Covid-19 vaccine, its international sales, and concerns of increased competition. While the emergency use authorisation for Sputnik and initial offtake are positives, the Street is divided on the overall gains for Dr Reddy’s, which has the distribution rights for the first 250 million doses in India.

Analysts at Citi Research believe that the vaccine can generate $200 million worth of operating profit in an optimistic scenario, but the upside could be lower if the entire 250 million doses are not procured in India or the prices are lower. As it will take time to commercialise the product, Dr Reddy’s will import the initial requirement. Similarly, Morgan Stanley believes that limited flexibility on supplies, pricing, and margins could imply weak economics to begin with.

Rising competition is another negative as the government on Tuesday said it would fast-track emergency use authorisation for foreignmade vaccines that have received a similar approval in other countries.

In a report written before the government’s decision, Kumar Gaurav of Kotak Institutional Equities said competitive intensity will increase with other vaccines including Novavax, Zydus Cadila, and potentially Johnson & Johnson’s Janssen, receiving approval by August/september. Given the new rules, Moderna and Pfizer-biontech could also apply for approval. And Dr Reddy’s may face competition much earlier than August.

While analysts have estimated certain revenues from Sputnik V, pricing and supply to the private market remains key for profitability. Analysts at Motilal Oswal (MOSL) Research believe while pricing is capped and distribution is also controlled by the government, opening up of vaccine distribution to the private market may lead to better pricing and margins. Assuming the current price of $2 (~150) per dose, they estimate the upside potential for sales at $300 million for the duration of the contract, they add. The upside potential also depends on supplies to international markets, given the price per dose is pegged at about $10 (~750).

While this is a near-term trigger, analysts at Edelweiss Research expect double-digit growth for the company to continue till FY23 on the back of a healthy portfolio in the US market, domestic recovery with the integration of Wockhardt, and launches in the European Union and emerging markets. Current valuations at 22 times its FY23 valuations are not expensive, but investors should await clarity on the near-term opportunities and consistent growth in key markets.