Dr Reddy's (DRL) has announced the settlement of its Revlimid capsules (Lenalidomide) patent litigation with Celgene [Bristol Myers Squibb (BMS)] in the US. This makes DRL the third player after Natco and Alvogen to sign a settlement agreement with the innovator for gRevlimid. Under the terms of the settlement, Celgene will provide DRL with a license to sell generic volume-limited amounts of gRevlimid capsules in the US after Natco's launch in March 2022 subject to regulatory approval. This limited volume constraint will be applicable till January 31, 2026 post which DRL will be able to sell the drug in the US without any volume limitations whatsoever. The oncology drug, indicated for treatment of multiple myeloma, had annual US sales of US$9 billion in CY19 as per BMS report.
Valuation & Outlook
The outcome of the company's gRevlimid litigation was one of the key monitorables for DRL due to the sheer opportunity size of the product. We believe this product is likely to remain a limited competition product. As per the agreement, DRL will be restricted to single digit market share in the first year. We expect this to grow to 12% share in the final year (January 2026). Due to uncertainty about the settlement timeline we had not modelled for this opportunity earlier. However, with launch certainty coming in and assuming DRL's gRevlimid launch in October 2022, we expect NPV of Rs. 510 for DRL. Also, we remain positive on the company, banking on the management's focus on simultaneous launches across geographies and segments besides realignment of R&D spend towards - Global Generics, Biosimilars and PSAI segment. Strong FCF generation, healthy balance sheet are some legacy strongholds for the company. We believe efforts taken in the last few quarters are sustainable and should support stable performances, going ahead. We maintain BUY and arrive at a target price of Rs. 5710, which includes base business value of ~Rs. 5200 (26x FY22E EPS of Rs. 200) + Rs. 510 for NPV of gRevlimid.
For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_DrReddy_CoUpdate_Sep20.pdf
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