DRL seeks a booster from Sputnik V but hurdles in scaling up remain

Even as the company investigates complaints of malpractice in the Ukraine, hurdles in scaling up the Russian vaccine remain the bigger challenge in the near term

Hyderabad-based drug major Dr Reddy’s Labora­tories (DRL) is navigating a challenging business environment after a tough first quarter in fiscal 2021-22 — from muted revenue growth in overseas geographies to a subpoena from the US market regulator to delays in scaling up its Covid-19 vaccine.

Last Tuesday, the stock hit a three-month low, falling 10 per cent to Rs 4,844 on the BSE, after the company reported a one per cent year-on-year (YoY) decline in net profit to Rs 570.8 crore for the June quarter. Reports of a subpoena from the US Securities and Exchange Commission (SEC) for documents concerning a probe against alleged malpractices in Ukraine also caused investors to panic.

DRL said it has started a detailed investigation into an anonymous complaint, which alleged that healthcare professionals in Ukraine and potentially in other countries were provided with “improper payments” by or on behalf of the company. This is in violation of the US Foreign Corrupt Practices Act; since DRL is listed on the New York Stock Exchange, it comes under the purview of this law.

A US law firm is conducting the investigation at the instruct­ion of a committee of DRL’s board. “The disclosure made by us is not a new development. We reported on it in November 2020…. We have ourselves initiated an investigation into the matter with the help of an external law firm,” a spokesperson said.

The company received a subpoena to produce some documents from the US SEC on July 6. “Since these investigations and outcomes take a long time, right now, there is no way to predict the outcome,” the spokesperson said.

Analysts, however, do not expect much of a long-term impact from this development. “Usually, if such allegations are substantiated, at best it results in a financial penalty. At this point in time, it is not right to speculate the quantum of the penalty, if any, but we do not see this major long-term overhang,” said a Mumbai-based analyst requesting anonymity. Most analysts did not expect any ban or restrictions on sales in Ukraine or other geographies.

Indian pharma has faced US antitrust probes before. For example, in May 2019, a lawsuit was filed in a district court in Connecticut in which 20 drug-makers (including seven Indian players) were accused by 44 US states of colluding to inflate drug prices by up to 1,000 per cent.

The bigger immediate challenge for DRL are the hurdles in scaling up the roll-out of Sputnik V. Around six Indian contract manufacturing sites are working to bring the product to market, including vaccine giant Serum Institute of India; an India-made product is not expected before September-October.

Limited imports from Russia have not helped to roll out large volumes of the vaccine. “Sputnik V opportunity is also shrinking as supplies are unlikely to ramp up until September, and two competitor vaccines could hit the market by then,” said Kunal Randeria, analyst, Edelweiss Securities.

DRL, however, hopes to bank on the opportunity Sputnik Light presents. “We have received 3.15 million doses of component 1 and 450,000 doses of component 2 of the Sputnik V vaccine. We are working closely with the Russian Direct Investment Fund (RDIF) to ramp up supplies. We are also working closely with our partners in India for manufacturing readiness. We expect locally manufactured doses to be available from September-October,” a company spokesperson said.

The spokesperson added that it will submit data from the phase 3 trials of Sputnik Light in Russia before the Indian drug regulator’s subject expert committee, seeking marketing authorisation in India.

If Sputnik Light gets regulatory approval, it significantly increases the availability of the vaccine. Sputnik Light is the first dose component of the Russian vaccine, which is a heterogeneous vaccine or one that uses two different components in two doses. Single dose Sputnik Light could expand coverage significantly.

“Therefore, imports, manufacturing in India and marketing authorisation of Sputnik Light are the three key scenarios we are working on right now,” the DRL spokesperson adds.

The Sputnik V vaccination, which began as a pilot in May 2021, has now reached around 80 cities in India.

DRL also has the option to expand its partnership with RDIF to other countries, though India remains the priority. “Any movement related to exports will be considered only after the vaccination needs of India are satisfied,” it said.

Even as it looks to the future, the first quarter of FY22 has been a challenging one. The company admitted that it was an “unusual quarter” in some ways as it faced price erosion in the US generics business, as well as a decline in sales of bulk drugs.

Ebitda margins were down 560 basis points YoY to 20.7 per cent and gross profit margin, too, fell 380 bps primarily on account of price erosion and inventory provisions of few products. In fact, North American sales, which account for 37 per cent of group revenues, were up only 1 per cent (due to price erosion).

But the India revenue, which accounts for 18 per cent of group revenues, grew 69 per cent YoY, higher than the Street’s estimates. DRL’s India business witnessed traction on three counts — better traction in the chronic illnesses segment, demand for its Covid-19 portfolio, and the full-quarter impact of the generics portfolio acquired from Wock­hardt in Q1 FY21.

“We expect growth in the upcoming quarters backed by scale-up in the recent launches, continued new product launch momentum and increased market share,” the spokesperson claimed.

It launched four products in the US in June quarter, and two in Canada. “Price erosion is not new and is now an anticipated part of the business model in the US as we look to defend our market share. In that regard, timing-wise Q1 was unfortunate for us in a sense in the US market. We felt the impact of pricing erosion but could not see full realisation of the value of recent big launches,” the spokesperson explained.

DRL expects to grow in double digits in the emerging markets such as Russia and CIS countries, which account for 12 per cent of revenues and where it clocked a 14 per cent YoY growth in June quarter, and invest to drive over-the-counter (OTC) products in both emerging markets and India. But the revival of the US business along with the scale-up of the Sputnik vaccine in India is critical for DRL’s margins in the coming quarters.