Edelweiss: Dr. Reddy's Laboratories - Favourable litigation outcome on generic Allegra 24D

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n  Generic Allegra D24 litigation outcome

The US District court of New Jersey, in a ruling, has lifted sanofi-aventis’s earlier motion for a preliminary injunction (PI) against Dr. Reddy’s (DRRD) motion, which had restricted the generic launch of Allegra D24 (fexofenadine/pseudoephedrine 180/240 mg extended release tablets). DRRD as a result of this favourable outcome will be able to launch product with immediate effect. The company received the ANDA approval for fexofenadine in March 2010.

Our view

Although DRRD would launch the generic Allegra D24, post the favourable litigation outcome, it will not have a material impact on the earnings of the company, as sanofi-aventis is likely to switch to OTC version of the product by March 2011, which would likely offset upsides from generic launch of prescription product. However, Sanofi does not have any exclusivity on the OTC extension of Allegra D 24, which could enable DRRD to switch over to OTC, over next three-six months.

DRRD has a FTF exclusivity position on generic Allegra D24 and we expect DRRD to clock USD 10 mn of revenues in FY11 from this product. Post OTC launch, assuming 15% market share for DRRD (30% price erosion), it could incrementally contribute USD 20-25 mn annually, over next two years with limited competition.

n  DCGI ban on nimesulide

DCGI has ordered ban on three drugs, nimesulide suspension, cisapride and phenylpropanolamine, of which nimesulide was manufactured by Dr Reddy’s, Panacea biotech and others. Nimesulide suspension contributes ~INR 200 mn or 2% of total domestic sales of DRRD. This could lead to PAT loss of ~INR 100 mn for DRRD.

n  Outlook and Valuations

We maintain our overall estimates on generics Allegra D24, pending clarification on the anticipated opportunity loss from OTC product; however, we believe incremental earning impact could be 2% on FY11 EPS. We maintain ‘HOLD/Sector Out performer’ on the stock