Shot in the arm for Dr Reddy's outlook as court clears block on US generic

Dr Reddy's has been struggling to retain its sales growth in the US market due to fewer big-ticket launches and delayed product approvals

The stock of Dr Reddy's Laboratories was up about six per cent on the bourses, after an appellate court in the US on Tuesday cleared the way for the company to resume sales of a Suboxone generic. The drug is used to treat opioid addiction and is expected to generate as much as $100 million (a little over Rs 7 billion) in revenue annually.  

Dr Reddy's had stopped selling the drug after a lower court gave an adverse verdict in June. Prior to the restraining order, the company had reportedly earned $25 million from the drug, which has an overall market size pegged at $1.8 billion. The development comes as a shot in the arm for Dr Reddy's, which has been struggling to retain its sales growth in the US market due to fewer big-ticket launches and delayed product approvals. 
 

Analysts termed the development a big positive but noted a multiple player market could impact the company's share. Mylan has already settled with Indivior (the innovator) and is expected to soon enter with its own generic version of Suboxone, beside an authorised generic in the US market. "Later competition includes Alvogen (has won the case in a lower court), Par (settled already but yet to get approval) and Teva. On a steady state, Suboxone should be a six generic player market," said a Credit Suisse report.
 

Increased competition is expected to trigger a fall in prices and the potential market share of generic versions of Suboxone at each of these companies.

Meanwhile, analysts at Edelweiss Securities have estimated a potential revenue upside of $100 million in annual sales from the drug for Dr Reddy's, assuming Mylan also launches its version after the settlement with Indivior. Equirus Capital believes the imminent launch of the Suboxone generic could add annual revenue of $90-100 million for Dr Reddy's, assuming the market comprises three players. 

The contribution of US sales as a proportion of the company's total revenue has come down to 38 per cent, from nearly 50 per cent level only three to four years earlier. Despite the currency leverage, revenue growth from its formulations business in North America remained flat at about Rs 14.3 billion in the quarter ended September.  
 

The relaunch of Suboxone would help the company to stabilise its US revenue in the second half of the current year. Brokerages are expected to increase their FY19 earnings estimate by 10-15 per cent, as four-and-half months remain in the current financial year. In addition, the company is expected to target higher revenue growth next year with the help of other launches, including generic versions of Copaxone (for multiple sclerosis) and NuvaRing (a contraceptive) in 2019.
 

Credit Suisse says Dr Reddy's has received approval for the generic of Diprivan (a sedative), which has a market of $300 million in the US. The generic would generate sales of $20-25 million. While analysts believe the company has a high-value portfolio in Abbreviated New Drug Applications, the issue is about the timing of launch, level of competition and ability to gain share against the competition. The latest ruling is a positive but given the pricing pressure in the US market, investors should await clarity on product launches and consistency in sales growth before considering the stock. The scrip is trading at 20 times its FY20 earnings estimate.