CLSA Research is bullish on Dr Reddys Laboratories and has maintained buy rating on the stock.

CLSA report on Dr Reddys Laboratories:

Dr Reddy’s is FTF (First to File) on Eisai’s USD 1.2 billion Aciphex (Rabeprazole) and has  co-exclusivity rights along with Teva. Both Teva and Dr. Reddy’s have asserted  unenforceability of the ‘552 patent based on inequitable conduct. Based on the  summary judgement statements, we believe there is a high probability of Teva and  Dr. Reddy’s winning on this count. Teva, which has already received final approval,  may launch the drug at risk and source the API from Dr. Reddy’s – sharing a part of  the profits with Dr. Reddy’s. The profit opportunity for Dr. Reddy’s can be as high  as USD 75-100m or Rs 20-25 per share and will improve visibility for FY08/09 profits. At 16.5x FY08CL (excluding any Aciphex related income), we believe Dr. Reddy’s pricing in concerns on earnings slowdown and deteriorating Betapharm fundamentals. Risk reward is favourable. Maintain BUY. 

Aciphex patent litigation history 

Aciphex is protected by the patent no. 5,045,552 listed in Orange Book. This patent  ‘552 patent expires in May 2013. Aciphex was approved by the FDA in 1991. Teva and  Dr. Reddy’s filed a Para IV challenge on ‘552 patent. Only Teva asserted the patent  invalidity defence. Dr. Reddy's had stipulated to the validity of the '552 patent and  both Teva and Dr. Reddy’s are asserting unenforceability based on inequitable conduct. Eisai had filed for a summary judgement on the above two counts and a judgement was delivered in Oct-2006. 

Summary judgment ruling indicates proving inequitable conduct possible 

While Eisai won summary judgment on the validity of ‘552 patent, the judge’s opinion  on inequitable conduct was mixed with the court concluding that there were genuine  issues of fact requiring a trier of fact to assess both materiality and intent in Eisai's  failure to disclose the co-pendency of the '013 application, which dealt with a homolog  of rabeprazole, as well as Eisai's failure to disclose the patent office's rejections of  certain claims in the '013 application. Based on these observations, we believe there is  a high probability of Teva and Dr. Reddy’s winning on the count of inequitable conduct  and hence unenforceability of the patent, clearing the way for a 180-day exclusivity. 

Possibility of at-risk launch by Teva, API sourced from Dr. Reddy’s 

We believe that there is a possibility of an at-risk launch by Teva (if they take an  aggressive stance and assume that lower court will grant unenforceability - leading to  only single damages in case they lose later). While Dr. Reddy’s doesn’t have the  balance sheet strength to undertake an at-risk launch, we believe Teva may source the  API from Dr. Reddy’s to preclude a potential competitor (Only Dr. Reddy’s and Cipla  have early DMFs on Rabeprazole, Teva doesn’t have a DMF). A 25% profit share for Dr.  Reddy’s can imply upto USD 75-100m (Rs 20-25/share) profits for Dr. Reddy’s and improve visibility for FY08/09 profits. The stock has underperformed the market by 22% in the  last 12months and is beginning to price in risks related to deterioration in business  fundamentals for Betapharm. A positive outcome on Aciphex patent litigation and  potential value discovery in R&D pipeline can be potential triggers. At 17.6x FY08CL  (w/o Aciphex profits), risk reward is favorable. Maintain BUY.