On September 18, shares of Dr. Reddy's Laboratories (DRL) closed 10.36 percent higher at Rs 5,326.70 on BSE as investors lapped up the stock after the company settled patent litigation with the US-based Bristol-Myers Squibb's unit, Celgene, over cancer treatment Revlimid.
"In settlement of all outstanding claims in the litigation, Celgene has agreed to provide Dr. Reddy's Labs with a licence to sell volume-limited amounts of generic lenalidomide capsules in the US beginning on a confidential date after March 2022," said a regulatory filing by the company on September 17.
Shares of this pharma heavyweight are in investors' focus for good reasons.
The stock, in fact, has been in the limelight through the year, so far it has surged over 85 percent in the calendar year 2020 while the benchmark Sensex is still 6 percent down.
This is a stellar comeback for the stock which underperformed Sensex in the previous year.
Data from Ace Equity shows that the stock has outperformed Sensex in 7 out of the last 12 years (including 2020 so far).
Further upside possible
While investors are gung-ho about the stock's stellar returns, some brokerages say the prospects of the company are bright and believe the stock will rise further in the days to come owing to the company's strong FCF generation and healthy balance sheet.
Global brokerage firm Credit Suisse has an 'outperform' rating on the stock and it raised the target price of the stock to Rs 5,750 from Rs 5,100.
The global brokerage firm is of the view that Revlimid generic cashflows should be significant (over $700 million).
As per CNBC-TV18, Credit Suisse believes Dr. Reddy's is one of the two players that can market Avigan in the US for COVID treatment. Besides, the company can increase share in Suboxone with innovator guiding for lower volume.
Domestic brokerage firm ICICI Direct has a 'buy' call on the stock with a target price of Rs 5,710.
"We maintain buy and arrive at a target price of Rs 5,710, which includes the base business value of nearly Rs 5,200 (26 times FY22E EPS of Rs 200) + Rs 510 for NPV of gRevlimid," ICICI Direct said.
ICICI underscored that the outcome of the company’s gRevlimid litigation was one of the key monitorable for DRL due to the sheer opportunity size of the product.
The brokerage believes this product is likely to remain a limited competition product.
"As per the agreement, DRL will be restricted to single-digit market share in the first year. We expect this to grow to a 12 percent share in the final year (January 2026). With launch certainty coming in and assuming DRL’s gRevlimid launch in October 2022, we expect NPV of Rs 510 for DRL," said ICICI Direct.
ICICI Direct, like most brokerages, is positive on the company, banking on the management’s focus on simultaneous launches across geographies and segments besides realignment of R&D spend towards - global generics, Biosimilars and PSAI segment.
ICICI believes efforts taken in the last few quarters are sustainable and should support stable performances, going ahead.
Brokerage firm Emkay Global has a 'hold' call on the stock with a target price of Rs 5,325.
"We incorporate gVascepa launch in our estimates from FY22 onward (currently there is API shortage in the market and hence a launch can be 1-2 quarters away), which adds around 9 percent/7 percent to our FY22/23E EPS. We value the stock at 25 times September 2022E EPS and add a Rs 333 NPV to arrive at a target price of Rs 5,325," Emkay said.
However, some brokerages point out the valuation of the stock can puncture its rally.
The stock is still a 'sell' for Kotak Institutional Equities, with a target price of Rs 3,700.
"Even as we acknowledge the positive developments around US pipeline products Ciprodex, Vascepa, Kuvan and now Revlimid, which have mitigated risks for the US, top-5 products in the US will now continue to account for nearly 40 percent of FY2023E EPS, with the stock trading at 18 times on FY2023E EPS, including Revlimid," Kotak said.
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