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R&D stalwart eyes generics market

Jun 23, 2001

29th May 2001 was a landmark day in the history of Dr.Reddy’s Laboratories Ltd (DRL). Chairman, Dr. Anji Reddy’s, excitement knew no bounds. This was for no small reason for the company announced out-licensing of its diabetes molecule (DRF 4158) to Novartis AG, a world leader in healthcare. As per the terms of the agreement, Dr. Reddy would receive US$ 55 m in up front and milestone earnings. This is little less than double the company’s fiscal 01 earnings. As per the terms of the agreement, this milestone payment would be received prior to commercial launch of the molecule. While Novartis would have exclusive rights for worldwide development and commercialization, DRL would have co-promotion rights for India. Though this was not the first time that the company out licensed its research molecule, the huge milestone payment was reflective of the company’s strength in pharma R&D. DRL has been licensing its molecules to multinational companies for further development after conducting pre clinical studies, as part of its strategy to finance huge clinical trial costs. The company has already licensed two molecules (DRF-2725 and DRF 2593) in the anti-diabetes area to Novo Nordisk, a world leader in diabetic segment. This has earned the company, US$ 8 million till date (the total value of these deals however is not disclosed).

And that’s not all. The company has slew of molecules in its pipeline, which are capable of giving such pleasant surprises in the times to come. The company’s R&D Pipeline is summarized in the table below.

Dr. Reddy’s R&D Coffer
Molecule Name Therapeutic
DRF 2593 Diabetes Licensed to Novo Nordisk.
Currently in Phase II of clinical trials
DRF 2725 Diabetes Licensed to Novo Nordisk.
Currently in Phase II of clinical trial in several
regulated markets including US and Europe.
Worldwide launch expected in 2004-05
DRF 4158 Diabetes Licensed to Novartis.
Pre-clinical already completed.
DRF NPPC Diabetes Pre-clinical completed.
Exploring licensing prospects.
DRF 1042 Cancer Phase I Clinical trial
DRF 1644 Cancer Currently, in pre-clinical studies
DRF ACXX Cancer Currently, in pre-clinical studies
DRF 4848 Pain Management Pre-clinical studies
DRF 4832 Cardiovascular Clinical trial contract given to
Simbec Research, UK

Coming down to the business model of the company, the revenue mix can be summarized as shown in the chart. While the branded formulations business is a cash cow for the company, the bulk drugs business apart from earning export revenues, helps in vertical integration for formulation manufacturing. The US generics business offers big growth opportunity for the company going forward.

The company’s acquisition of Cheminor Drugs, last year helped it in making a significant presence in high margin US generic market. Cheminor was one of the few companies to have made entry into the US regulated markets way back in 1990. A very rich and mature ANDA (Abbreviated New Drug Application) filings inherited from Cheminor has helped DRL to create an enviable basket of products for the US market.

Dr. Reddy currently has 28 ANDA filings to its credit and plans to file 11 new ANDA’s in the US in the current year. Last year was a maiden year of performance as far as generics is considered. Dr. Reddy was able to notch up maiden sales of US$ 6.5 million during its first four months of operations (December to March 2001), successfully gaining strong market share in recent launches (Famotidine and Oxaprozin). The company has forged alliances with top-tier companies (Par, Leiner Healthcare, Warrick) to ensure timely launches for its pipeline products through co-marketing and rapidly acquiring a critical mass in the US generics market.

The potential from the US generics business is huge. To give an example revenue potential from fluoxetine, a blockbuster anti-depressant drug is estimated to notch up revenues in the range of US $ 40-50 million, provided the company is successful in getting the six month marketing exclusivity which it has applied for with US FDA. Together, all ANDA filings of the company should sustain a strong revenue momentum from the generics markets in the next 2-3 years.

The company recently raised US$ 124 million from ADR proceeds, diluting 18% of the company's equity. It plans to use these proceeds for integrating its R&D projects and acquisitions to fuel inorganic growth. We expect that with ADR fund deployment coupled with milestone receipts from licensing of its molecules the company would be able to take a step towards self-sufficiency in its R&D work. A modest beginning has already been made with the company conducting clinical research for its cardiovascular molecule (DRF 4832) on its own.

There are number of valuation triggers for the company at this point of time viz. windfall revenue gains from its research pipeline, US generic market earnings visibility, inorganic growth from ADR funds, further unlocking of intellectual property, strong core business fundamentals etc. However, the markets seem to have built in lot of expectations from the company. The flip side thus is that any negative news either from the US generic market or on the R&D front (failure of a molecule) could lead to a fall in valuations. Again, any delay in deployment of ADR funds, could impact its capital return ratios negatively in the near term.

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