Dr Reddy’s string of announcements fails to impress analysts; stock could fall 30%

NEW DELHI: In a string of announcements over the last three days, Dr Reddy’s Labs has settled patent litigation with Celgene, launched an over-the-counter eye drop in the US and sealed the deal to bring Russian Covid-19 vaccine to India.

Thanks to these, shares of the company have also appreciated. The stock has been the biggest Nifty gainer for the last three days, rising nearly 18 per cent. But, analysts on the Street are not impressed and rather see limited upside for the stock.

Kotak Securities has a ‘sell’ recommendation on the stock with the target at Rs 3,700, a potential downside of over 30 per cent from current market price as it believes risk-reward of the scrip is unfavourable.

Dr Reddy’s settled litigations with Celgene on Revlimid patents and this will allow a volume-limited launch after March 2022 and without volume limitations from January 2026.

Chirag Talati, an analyst at the firm said the sharp run-up in the stock captures the recent positive developments fully. He expects further 3-5 settlements for CY23-24 launch timelines, thereby capping the upside.

Analysts at ICICI Securities said the development provides certainty to launch and a material earnings accretion over FY23-26. “We estimate Dr Reddy’s to generate cumulative sales and profit of $2.5 billion and $1.6 billion, respectively, over this shared exclusivity period. We value this opportunity at Rs 514/share for the company considering the annual market size of $8 billion
and gradual market share increase to 18 per cent in FY26,” said Sriraam Rathi of ICICI Securities.

Rathi has an ‘add’ rating on the stock with a target of Rs 5,214, which means a potential downside of over a per cent from the current market price.

In Friday's trade, shares of the company were trading up 8.45 per cent at Rs 5,234, with days high at Rs 5,302.85. The stock is up 82 per cent in the current calendar year and over 90 per cent in the last one year.

Emkay Global said due to impending litigation, the Street did not ascribe any value to Revlimid opportunity and thus, the settlement gives the certainty of launch and can add a Rs 333 per share net present value.

The broker also factored in Vascepa launch in its estimates, setting target prices at Rs 5,325, meaning a marginal upside from here on.

Analysts are also not sure if the deal to bring Covid-19 vaccine in India will be beneficial for the company as there is a lot of uncertainty. For starters, it is yet to complete its phase-3 trials to prove its safety.

“Dr Reddys’ would carry out phase 3 trials in India and, once approved, we understand opportunity can be large and result in one-time revenue gain (if trials are successful); albeit, there is no certainty on trial outcome. And more importantly, pricing would be keenly watched by the government. We note several vaccine efforts are underway globally and Sputnik would be likely one amongst several competing candidates,” said Bhavesh Gandhi, Lead Analyst – Institutional Equities, Yes Securities.

Valuations and risk
Kotak Securities said the stock is trading at 18 times the expected earnings per share (EPS) of FY23. On the other hand, ICICI Securities raised FY23 revenue estimates by 7.8 per cent and EPS projections by 38 per cent to factor in Revlimid launch. It has rated the stock based on 25 times the expected EPS of Sep 2022 base. Emkay has also rated the stock at similar valuations and upgraded FY22 and FY23 EPS estimates by 9 per cent and 7 per cent, respectively

As per brokerages, the key downside risks are delay in the launch of key products in the US and regulatory hurdles.