The Suboxone opportunity for Dr Reddy's

It has been a great week for pharma stocks. After Sun Pharma received the US FDA clearance to restart supplies from its Halol facility, Dr Reddy's has also received approval for the generic version of the opioid addiction drug Suboxone.

The news on both these developments was expected, but for it to finally happen after several false starts was the major highlight.

Now, a little more Dr Reddy's. To understand the opportunity from Suboxone, it is first important to understand the opioid market itself.

Opioids are described as a class of drugs that include powerful pain relievers that contain codeine, morphine and are available legally via prescription. While the drugs are prescribed to patients suffering from pain, regular use, or misuse can lead to a dependency on the drug.

Opioids also consist of illegal drugs such as heroin. The US, as described by the US FDA, is facing a "public health crisis of staggering human and economic proportion," due to opioid abuse.

Of the total deaths in the US caused by drug overdose in 2015, 63% were caused by the use of an opioid. President Donald Trump in October 2017 declared the opioid crisis a public health emergency.

So, how does Suboxone fit in? It is an anti-opioid addiction drug, the innovator drug of the UK-based pharma company, Indivior Plc. An innovator drug is the first drug containing its specific active ingredients to receive approval for use from the US FDA.

The drug essentially mimics the effect of an opiate and reduces the withdrawal symptoms in the patient during the de-addiction process.

The market size of this drug is currently about $750 million in the US and despite competition from other de-addiction drugs, Suboxone averaged a market share of 58% in 2017.

A generic version of Suboxone is one of the eight drugs that Dr Reddy's acquired from Teva in 2016 for a total of $350 million.

The FDA had asked Dr Reddy's for  details on the drug in January 2018, and the company has now received approval for the launch.

While Dr Reddy's has said they will launch the generic version of the drug in the US, it faces multiple ongoing issues that could hurt its prospects.

First, Dr Reddy's will launch the drug "at-risk," meaning drug will be launched in the US while it is fighting a patent litigation battle with Indivior.

There are a total of seven patents which were being litigated. Of these, Dr Reddy's got a verdict in its favour for four of these patents.

Some of these verdicts have been challenged by Indivior in an appeals court, and the remaining three patents of the seven are currently under litigation.

If Dr Reddy's loses a verdict on any of these litigations, then there is a chance the company will have to pay damages.

It is likely the damages could amount the loss of sales by the innovator and possible withdrawal of it from the market as well.

But, it is important to note, as Nomura points out, that two of the three patents being litigated seem to be an extension of the old patents that Dr Reddy's already won. And the company already has a favourable verdict on the 4 patents, which is currently in appeals.

The other major issue Dr Reddy's faces is competition. There are five known generic filers for this drug including Dr Reddy's. The others include Teva, Mylan, Endo and Actavis. Both Mylan and Endo have settled with Indivior.

Endo as per the terms of the settlement will launch its generic drug in January, 2023. The terms of Mylan's agreement, that was approved on Friday by the US FDA, are not disclosed.

That leaves Actavis with the possibility of approval in the US and Teva, that is also awaiting final US approval.

The factors that could affect Dr Reddy's also include Indivior launching an authorised generic, where the innovator manufactures the drug but is  marketed by another company, immediately.

The opportunity for Dr Reddy's financials depends on this competitive scenario. The range for a best case varies from Rs 25 to Rs 30 all the way to Rs 60 in a no competition scenario.

Some analysts are projecting an average $80-85 million worth of sales in the first year.  The conservative estimates include Nomura, which is pencilling in Rs 10 in FY18 per-share profit and Rs 12 in FY20.

The other factor to watch is competition from another drug, Sublocade, also launched by Indivior.

The company launched this drug in the first quarter of calendar year 2018. The difference is that Sublocase is a long acting drug, the injection just needs to be taken once a month versus Suboxone that is a daily dose.

The combination of these factors indicate that while the approval for Dr Reddy's is no doubt a positive, it is still a story that is unfolding.