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Expert committee recommendation aides business visibility for Sputnik

* The government’s Subject Expert Committee (SEC) of the Central Drugs Standard Control Organization (CDSCO) has recently recommended RDIF’s Sputnik V COVID vaccine for Emergency Use Authorization (EUA) in India.

* Dr Reddy’s (DRRD) has exclusive marketing and distribution rights for the first 250m doses of Sputnik V vaccines in India.

* Considering the base case scenario of a pricing cap of USD2 per dose for the vaccine, we believe the upside potential for revenues is ~USD300m for DRRD for the duration of the contract.

* Accordingly, we raise our EPS estimate for DRRD by 5%/2% for FY22/FY23, factoring in the opportunity in the Vaccine business. We continue to value DRRD at 25x 12M forward earnings to arrive at Target Price of INR5,410. We maintain Neutral on a limited upside from current levels.

Details of the recommendation

* Per the news reports, SEC of the CDSCO has recommended the EUA of RDIF’s Sputnik V COVID vaccine in India. Considering the recommendations, the Drugs Controller General of India (DCGI) would take the final call on the vaccine’s approval. Subsequently, the vaccine would be available for marketing in India.

* DRRD has exclusive marketing and distribution rights for the first 250m doses of the Sputnik vaccine in India. While the pricing is capped and distribution is also controlled by the government authority for COVID vaccines, the opening up of vaccine distribution to the private market may lead to better pricing and margins for DRRD. Many manufacturers have already been contracted with producing the vaccine for global as well as Indian use.

* Assuming a current pricing cap of USD2 per dose for the vaccine, we believe the upside potential to sales is ~USD300m for DRRD for the duration of the contract.

Clinically effective, but slow pace of vaccination in home country (Russia)

* The Sputnik V vaccine is based on the adenovirus viral vector platform, and interim results of the phase 3 trials published in The Lancet indicate the Sputnik V is 91.6% effective in preventing symptomatic COVID. Phase 3 trials for the vaccine have been conducted in India, the UAE, Venezuela, and Belarus. Particularly for India, data related to the bridging trial is awaited and expected to be submitted by end-Apr’21.

* While Sputnik V is registered in 55 countries, interestingly, per Bloomberg, Russia has vaccinated only ~4.6m people (~3.2% of its population).

* Other countries that have administered this vaccine are the UAE, Turkmenistan, Kazakhstan, Algeria, Iran, Palestine, Argentina, and Serbia. Some countries such as Mexico, San Marino, Slovakia, Paraguay, Montenegro, Venezuela, and Bolivia have received deliveries of the Sputnik V vaccine.

* Trials are also underway for a Sputnik V and Oxford combined vaccine to study the immunogenicity and efficacy of the combined use of the two vaccines.

Evolving landscape for COVID vaccine development/manufacturing

* The competitive landscape of COVID vaccines is evolving with country-specific approvals for vaccines. Companies such as Pfizer and Moderna continue to explore more opportunities for vaccine supply. Furthermore, other vaccines such as Novavax (which has shown 96.4% efficacy) and Bharat Biotech’s nasal vaccine could disrupt the market. Protection from the different strains of COVID, with minimal side effects, plays a critical role in determining which vaccine (s) would dominate the global markets.

Valuation and view

* We have raised our EPS estimates for FY22/FY23E by 5%/2%, accounting for an upside from the Sputnik V vaccine distribution contract. We expect an 18% earnings CAGR over FY21–23E, led by a sales CAGR of 11%/27%/21% in North America / Domestic Formulation / Pharmaceutical Services and Ingredients (PSAI), supported by a 360bp margin expansion.

* We continue to value DRRD at 25x 12M forward earnings and arrive at TP of INR5,410. We maintain Neutral on a limited upside from current levels.

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