Dr Reddy’s Revlimid settlement to boost US earnings beyond FY23

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Dr Reddy’s Laboratories’ settlement with Celgene on Revlimid patents is a positive, and will open up opportunities in the US market, post-FY23. After several favourable rulings in the US recently, including this, the stock has been on the climb in the past month gaining 22%. But with today’s gains of about 9%, its already valuations have stretched even more.

Sure enough, Revlimid is a large product in the US with sales of about $8 billion. Dr Reddy’s will be allowed a volume-limited launch after March 2022, which means there will be further earnings boost. However, several others have launched product applications. Nevertheless, Dr Reddy’s should be able to secure sizeable revenue from the product launch.

“Dr Reddy’s settlement is Celgene’s third settlement on 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.

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A recent ruling on generic Vascepa is also expected to improve earnings growth in the US. Further, Dr Reddy’s is expected to increase the number of its US drug launches in the near term. Lately, Dr Reddy’s signed an agreement with Russia for the latter’s Sputnik V vaccine of about 100 million doses, if trials are successful in India. All this could help deliver better earnings growth in the near term, say analysts.

“With limited price erosion in the base business/robust abbreviated new drug launches in the US, greater benefits from cost rationalisations, favourable demand in PSAI, 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.

As the Street had not in the past factored in potential earnings from these products, earnings revisions have increased lately. And the stock naturally reacted positively. However, these developments will play out in the longer run, so much can change depending on market dynamics at the launch.

While all the positive news around Dr Reddy’s is good for its earnings, the stock valuation is rich. “We await a better entry point on the stock,” said analysts at Motilal Oswal Financial Services in a client note. All the positives are expected to drive 30% yearly earnings growth in FY22. But, at the present price, the stock discounts its FY22 earnings about 26 times.

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