Dr Reddy's Labs hits 52-week high; stock rallies 5% in two days

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Shares of Dr Reddy’s Laboratories hit a 52-week high of Rs 2,700, up 2%, extending its previous day’s 3% gain on the BSE. The stock surpassed its previous high of Rs 2,687 recorded on September 28 in intra-day trade.

Since November 20, in past six seven trading days, the stock of pharmaceutical company has moved up 10% after an appellate court in the US cleared the way for the company to resume sales of a Suboxone generic. The drug is used to treat opioid addiction and is expected to generate as much as $100 million (a little over Rs 7 billion) in revenue annually. The S&P BSE Sensex was up 2% during the same period.

Dr Reddy's Laboratories Wednesday said it has launched chlorthalidone tablets, used to treat high blood pressure, in the US market. Quoting IMS Health data, Dr Reddy's Laboratories said, the Hygroton brand and its generic had US sales of approximately $ 122 million for the twelve months ending in September 2018.

“We believe this favorable preliminary injunction ruling enhances the probability of a positive outcome on the litigation front. If Dr Reddy’s wins the patent (305) litigation, it will be entitled compensation in terms of loss in profit due to blocked sales during the injunction period,” analysts at Elara Capital said in event update.

The company had received approval for gSuboxone on 15 June 2018, indicating compensation for loss of around 4-5 months of sales. Indivior (innovator) says it will continue to pursue ongoing infringement cases against Dr Reddy’s. However, if the company loses the lawsuit, it may be liable to pay damages, it added. The stock however was trading above brokerage firm target price of Rs 2,510 per share.

Brokerage view

Analysts at JP Morgan have ‘overweight’ rating on the stock with 12-month target price of Rs 2,850 per share, as the gSuboxone outcome in favor of Dr Reddy’s is positive and should drive strong growth in US revenues from the December quarter given limited competition launch in the near-term.

“Dr Reddy’s earnings over the last year have been adversely impacted by competition in some key products and delay in approvals due to Warning Letter. We are expecting resolution of outstanding regulatory issues and stabilization in US revenue trend with signs of earnings improvement likely to be a key catalyst for the stock,” the brokerage firm said in a report dated November 21.

We do expect a pick-up in launches over the next few quarters (not dependent on facilities under the Warning Letter) including some complex approvals in FY20. Growth recovery in the US coupled with benefit from cost optimization efforts should improve earnings trajectory over the medium-term. Dr Reddy’s approval and filings for complex generics underline the company’s focus on transition to growth driven by its niche product portfolio in the US supporting medium-term growth, added report.

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