Suboxone drug, USFDA approvals for plants will decide Dr Reddy's stock market rally.
Dr Reddy's Laboratories (DRL) has been one of the top gainers in the Nifty this week. It has outperformed the Nifty Pharma index by two percent (DRL has gained over six percent) and has rallied almost eight percent from the low of Rs 2,067 it had hit post Q1 numbers.
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There are a few factors for the optimism emerging on DRL, but the primary reason has to do with $750 million anti-drug addiction drug – Suboxone.
To recap, DRL received US approval for generic Suboxone on June 15, 2018 while the company had a pending litigation with its innovator Indivior.
Nonetheless, DRL launched the drug despite the risk of losing this litigation to Indivior and being liable for damages – hence it was an ‘at risk’ launch.
But, DRL had to withdraw the launch in a few days due to a temporary injunction imposed by a US court, which eventually turned into a permanent injunction in July.
This permanent injunction has stopped DRL from selling Suboxone in the US market until the patent litigation pending with Indivior is resolved.
So back to numbers, one can quite said that DRL started FY19 on a high note?
North America, which is DRL’s most important geography and comprises of 43 percent of total sales, grew six percent year-on-year (YoY) in Q1FY19.
This was significant as the US market grew after atleast eight quarters of decline, where they faced regulatory challenges and price pressure.
While drugs such anti-nausea drug Aloxi did contribute, one of the main reasons for this growth was sales of Suboxone generic.
DRL in a span of a few days sold $15-20 million worth of Suboxone generic boosting Q1 sales and in fact, offsetting price pressure seen in key drugs such as anti-cancer drug Daocgen generic.
Besides boosting Q1 numbers, it indicated the potential sales the drug could generate for DRL.
The hope of relaunching Suboxone in the US is keeping DRL’s stock alive and the reason is probably the latest development on the Suboxone generic litigation.
It’s as follows: DRL had filed an appeal in a US court on the preliminary injunction that was imposed on the company from selling the drug in June.
The US Court of Appeals has now granted a motion to expedite DRL’s appeal. This means, the arguments for and against lifting this preliminary injunction will be heard during the first week of October, just eight weeks from now.
This hearing according to analysts is crucial as the commercialisation of the drug depends on Appeals Court decision and this expedited hearing provides a timeline hence certainty.
There is a chance that if the Appeals Court overturns the earlier judgement, DRL will be able to relaunch the drug.
In case they do, the street still estimates that the company could generate $75 million or more in sales for the remaining FY19.
Besides Suboxone, other factors enthused sentiment as well. This included the fact that DRL has reinvited the US Food and Drug Administration (FDA) to reinpsect its oncology injectable plant - Duvvada and is in dialogue with the US regulator on the Srikakulam API plant.
Both of these have warning letters from the USFDA since November 2015 and observations from reinspections in 2017.
Despite these regulatory overhangs and delay in key drug launches such as contraceptive drug Nuvaring and multiple sclerosis drug Copaxone generic to 2019 versus expectations of 2018, the company sounded confident on the US market.
While not divulging numbers, DRL did say that company has seen lesser price pressure and is optimistic on stabilisation of the generic market and have visibility of 15-20 launches in FY19.
A few other factors enthusing included the company’s guidance on double-digit growth in India and emerging markets.
India, which reported 16 percent of sales and the second major market for the company, grew 30 percent YoY in Q1 supported by a low base.
Emerging markets, which comprises mainly of Russia, other CIS countries and Romania reported 18 percent of sales and grew 16 percent in Q1 after two consecutive quarters of decline.
The company is cautiously optimistic on margins and is undertaking tougher measures to improve efficiencies–this includes selling one of their antibiotic sites in the next few weeks and cutting back on costs including personnel.
Despite the recent rally and triggers lined up, some continue to remain skeptical.
Analysts cite issues such as the risk of delay of launches and more competition for DRL’s key drugs.
For example, Credit Suisse points out a risk to the company’s largest drug in the US –blood pressure drug Metprolol.
Credit Suisse thinks that 12 percent of DRL’s FY20 estimate is at risk due to impending competition from Cadila, Ingenus and Aurobindo.
Similar case for other key drugs such as cancer drug Doxil, where DRL has a 45 percent share and the chemotherapy drug, Decitabine.
While the street will wait by for the triggers to take the course, they will more near-term risks include decisions by US authorities.
On the one end, the USFDA accepting the company’s invite to reinpsect Duvvada and on the other, a US court deciding on whether DRL should sell Suboxone or not.
First Published: IST