Dr. Reddy's Laboratories share price: Jefferies Maintains Buy rating on the stock

Jefferies channel checks indicate API supply constraints for generic manufacturers of Vascepa. Amarin has added EU and China as new markets, thereby committing more volumes to its regular API vendor base. CCSB Taiwan has been the sole/key API supplier for both Hikma and Dr. Reddy's and is currently facing scale-up challenges. Both generics should gradually ramp-up through 2022 as API supplies scale-up. Jefferies cuts Dr. Reddy's Laboratories FY22E EPS by 1%. Maintain Buy rating on Dr. Reddy's Laboratories. Dr. Reddy's Laboratories share price today is Rs 4347, down Rs 80 or 1.8%.

Scale-up challenges at API supplier to generics:

Jefferies channel checks show that CCSB Taiwan has been the original Icosapent API supplier to Hikma and Dr. Reddy's. Both the generics have highlighted similar issues of API shortage preventing them from scale-up/launch in the market. The exact timeframe to resolution is difficult to estimate although we believe both companies will eventually scale-up during the year 2021, either through a second source or CCSB scaling up successfully. The API constraint is likely to also affect any other potential generics including Teva and Apotex. Supply chain constraints indicate that Vascepa will remain a limited competition product in the foreseeable future, even after the entry of Hikma and Dr. Reddy's Laboratories.

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Higher API and conversion cost have kept margins low for Hikma:

Jefferies estimated Amarin's API procurement cost at USD 200 per Kg and conversion at USD 40 per 1000 capsules to arrive at Gross margins of 79% (ex-2). In contrast, Hikma has indicated that initial margins on gVascepa are lower than for a typical launch of this type. We believe higher API costs at CCSB and higher conversion costs at Catalent are contributing to lower margins for Hikma. Costs can come down only once CCSB or alternate API suppliers scale-up.

Dr. Reddy's remains committed to launch, expect gradual ramp-up through FY22:

Vascepa remains a key product driving FY22 US revenues. Due to API supply issues, we anticipate a gradual ramp-up through FY22, with Dr. Reddy's achieving USD25mn revenues in FY22 vs USD50-60mn we had estimated earlier. Jefferies cut their FY22 revenue and EPS estimates by 1%/1%, leaving FY23 unchanged.