Dr. Reddy’s: Positive news flow continues - Views on News from Equitymaster

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Dr. Reddy’s: Positive news flow continues

Jul 20, 2001

Dr. Reddy's case for marketing fluoxetine (Prozac) 40 mg capsules has moved in the right direction. The U.S. appeals court has rejected the original patent holders case for rehearing regarding Prozac. Meanwhile Dr. Reddy’s was also successful in tying up the final outcome of its litigation with that of Barr Labs. It may be recalled that Barr Labs has ANDA for launching 10/20 mg fluoxetine and it recently won the litigation against Eli Lilly, the original patent holder of the drug for marketing the same with six months exclusivity. While Barr case was for 10 mg / 20 mg exclusivity, Dr. Reddy’s had a similar case (for the same drug) for 40 mg dosage.

It now effectively means that Dr. Reddy would be able to market 40 mg fluoxetine capsules with six-month exclusivity. It would be first time that an Indian company would market a drug with marketing exclusivity. The potential for Dr. Reddy’s is huge given the fact that the annual branded sales for fluoxetine are in the range of US $ 275 m. It is expected that fluoxetine sales would add an incremental net profit of US $ 16-17 m for the company. Dr. Reddy’s recorded a net profit of US $ 28 m for FY01.

In another positive development, Novartis and Novo Nordisk announced an agreement on the commercialization of the company’s diabetes molecule (DRF 2725 which is out licensed to Novo Nordisk). This agreement entitles Novartis exclusive marketing rights for US, Canada and Mexico while Novo Nordisk would continue to be responsible for the development and global regulatory approval. This agreement reinforces Novo Nordisk’s confidence in the molecule and priority it is attaching to it. The royalty payment to Dr. Reddy’s that would be spread over the commercial life of the molecule (if Novo Nordisk is successful to get it to market) could be eye popping.

At the current market price of Rs 1665, the stock is trading at 47x FY01 earnings. Dr. Reddy’s strong research and ANDA pipeline is capable of giving further such pleasant surprises in future. Further, ADR funds deployment for in-organic growth could be another trigger for the stock in coming weeks. Dr. Reddy’s plans to acquire a marketing company in the US. However, we reiterate that at the current valuations, markets have built in a lot of expectations from the company. Internationally, pharma companies see drastic fall in valuations on failure of molecules, as the markets tend to discount the gains ahead of the launch. The flip side thus for Dr. Reddy’s is any negative development could trigger a steep fall in valuations.

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