Dr Reddy's: Nexium launch approval will boost prospects

Nexium's US sales were $5.2 bn for 12 months to July 2015; competition is limited and firm can garner $40 mn revenues in FY16

Dr Reddy’s stock gained 5.5 per cent on Monday to close at Rs 4,192, after the company announced the launch of Esomeprazole Magnesium Delayed-Release-Capsules (in 20mg and 40mg dosages), a therapeutic equivalent generic version of NEXIUM®. Nexium, used for treating gastro-related disorders, reported US sales of $5.2 billion MAT (moving annual total) for the year ended July, according to IMS Health. Though Teva and Mylan already are there in the market, competition is limited and Dr Reddy’s can still garner $40 million of revenues in FY16 and more than $50 million in FY17, say analysts.

Getting an approval before the expected timeline of December, as estimated by some analysts, has excited the market. Notably, the launch has been permitted from a site other than Srikakulam facility, the original facility mentioned in the launch filing. The Srikakulam facility is yet to get cleared by FDA after inspections. This paves the way for more launches, as the management has requested for site transfers for other important products as well. Multiple sclerosis drug Copaxone generics is another multi-billion opportunity, approvals for which is awaited.

HSBC analysts, in note on September 16, had said the generic Nexium delay had been hurting the company, as competition was very limited. Now, the approval takes away such concerns, too.

The company has been on a strong footing in the US. Despite lower approvals for launches in the recent past, limited competition and niche products have been driving margins and growth. The company had seen North American sales, which contribute more than half to overall revenues, grow 14 per cent. The strong US growth has been taking care of soft growth in markets as Russia due to cross currency headwinds. Analysts at HSBC say Dr Reddy's is confident the gross margin improvement seen in the past quarter will continue for a large part of the year, as its market share in complex APIs like injectables (Vidaza, Dacogen) is sticky and in products like Reclast/Zometa and Valcyte, there is good traction. The analysts had revised their fair value target price of Rs 4,105 even before the Nexium approval. After approval, brokerages are likely to upgrade their target prices. Analysts at Karvy, while revising their earnings estimates, have upped their target price to Rs 4,480.

In another development, Dr Reddy's is buying intellectual property rights of Fondaparinux (anti-coagulant drug) from Australian company Alchemia for $17.5 million in cash on closing of the transaction. The product is a good revenue contributor to Dr Reddy's and now it will not have to share profits with Alchemia, which analysts at Karvy believe is a positive development.

Recently, Dr Reddy's also settled litigation to sell generic Kuvan, a $107-million drug. Though the launch timeline has not been given, it surely will boost the product pipeline.