Dr. Reddy’s: R&D is the key - Views on News from Equitymaster

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Dr. Reddy’s: R&D is the key

Nov 13, 2001

Dr. Reddy’s R&D coffer is getting bigger by the day! While most of the company’s molecules are still in early stages of development, the company has already recovered almost its entire R&D expenditure incurred in the last ten years. The purpose of this article is to provide a current status on the various molecules in its R&D pipeline. Dr. Reddy’s currently has 9 molecules in its pipeline as shown in the table below. Of these nine molecules 3 molecules, which are all in anti-diabetes segment, have been licensed to MNC pharma companies and a cardiovascular molecule has been given for contract research.

Of the three molecules licensed the company has already received US$ 13 m from upfront and milestone payments till date and is expected to receive another US$ 5 m very soon. This adds up to US$ 18 m, approximately Rs 855 m, as against Rs 900 m (approx) incurred by the company in the last decade on R&D expenses.

Dr. Reddy’s: Coffer’s getting bigger
Molecule Identity Therapeutic Segment Remarks
DRF 2593 Diabetes Licensed to Novo Nordisk. Currently, in Phase II of clinical trials.
DRF-2725 Diabetes Licensed to Novo Nordisk. Currently, in Phase III of clinical
trials in several regulated markets including US and Europe.
DRF 4158 Diabetes Licensed to Novartis. Currently in Phase I of trials.
DRF NPPC Diabetes Pre-clinical completed. Prospective licensing opportunity.
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.

DRF 2725 and DRF 2593:
Dr. Reddy’s had out licensed both these molecules in August’98 to Novo Nordisk. Both the molecules are insulin sensitiers. Novo Nordisk had inturn entered into an agreement with Novartis AG on the commercialization of DRF-2725 specifically in the regulated markets. This agreement was however put off by Novartis recently.

  • Current Status: DRF 2725 has just entered Phase III of clinical trials (the last stage of trials before which the molecule enters the market). While DRF 2593 is in Phase II of trials.

    Novo Nordisk seems to be attaching very high priority to DRF 2725 and has put the clinical trials of this molecule on a fast track. If DRF 2725 clears the last stage, it could be the first among new generation of dual acting insulin sensitiser, which could have huge market potential.

  • Receipts: Dr. Reddy’s has received US$ 8m as upfront and milestone payment from both the molecules till date. DRF 2725’s successful migration into Phase III is expected to trigger another payment of US$ 5m in the near term. The payment is expected from Novo Nordisk in the current quarter.

  • Competing Molecules: DRF 2725’s nearest competitor was a molecule from GlaxoSmithKline, which was recently withdrawn from Phase III trials. Though there are several other molecules under development from MNC’s, DRF-2725 is the only molecule in Phase III of trials. There are 7 other such molecules but they are currently in Phase II of trials and would take time before hitting the market.

    DRF 4158: Yet, another insulin sensitiser, Dr. Reddy’s announced out licensing of this molecule to Novartis in May’01 after its pre-clinical trials. According to the terms of the agreement, the company would receive US$ 55 m in up front and milestone earnings apart from royalty payments if the drug hits the market. The company has already received US$ 5 m in Aug.

    Most of the other molecules in the R&D stable of Dr. Reddy’s are in advanced stages of pre-clinical trials and thus offers potential for out licensing. Dr. Reddy’s is hiking its R&D budget rapidly, which has grown at a CAGR of 35% in last ten years. Dr. Reddy’s R&D budget is likely to cross Rs 500 m (US$ 10 m) this financial year.

    However, this is miniscule considering that the cost of bringing a NCE (New Chemical Entity) to the market is around US$ 500 m. Milestone payments from its licensed molecules could help the company in funding its R&D budget. Armed with higher cash flows, Dr. Reddy’s plans to conduct its own clinical trials in the long run instead of out licensing its R&D work to a MNC. As a first step towards this, the company has selected Simbec Research for conducting clinical trials for its cardiovascular molecule, DRF 4832.

    Revenues from the R&D front in the near term are likely to be driven by DRF 2725. This molecule is expected to hit the market by the end of 2004, if everything goes well. Going by historical statistics, there is around 50-60% probability of a Phase III molecule hitting the market. This could give Dr. Reddy’s several million dollars of revenues (approx US$ 125 m+ over 2010 cumulatively) as royalty payments.

    However, considering highly uncertain nature of royalty incomes, it is prudent not to factor in any revenues on this account. To summarize, the coffer is full of valuable diamonds but it is difficult to attach a price tag to it at this point of time.

  • You may also like to read our report on valuation of R& D pipeline


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