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Revlimid settlement: directionally positive

* Cadila announced the settlement of Revlimid patent suit with the innovator Celgene (BMS). As part of the settlement, Cadila is enjoined from marketing generic lenalidomide before the expiration of the patents-in-suit, except as provided for in the settlement. The settlement terms are not disclosed yet.

* While this is a positive news for the company, it is difficult to quantify the positive impact of the settlement given the confidential nature of the settlement. Our estimates suggest that gRevlimid could represent a stock price upside of Rs20-40, depending on the settlement terms.

* Our base-case upside of ~Rs20/share assumes low-single digit volume share in FY23E, with it gradually increasing to mid-single digit in FY26E. The bull-case of Rs40/share assumes settlement terms similar to Alvogen and mid-single digit volume share in FY23E, with it increasing to high-single digit in FY26.

* Given the lack of clarity on settlement terms and approval time, we view this as an option upside to our TP of Rs655. We reiterate Buy rating on the stock as we believe that the company’s innovation efforts continue to remain underappreciated

Reiterate Buy but maintain TP: While the revlimid settlement is a positive news for Cadila, we await more clarity on the settlement terms before baking in the upside. Hence, we maintain our TP of Rs655 despite, with an estimated upside of Rs20-40 per share from the settlement. Our base-case NPV calculation of Rs20/share is conservative and assumes: 1) settlement terms inferior than Alvogen; 2) launch in FY23E and market share of low-single digit in FY23E, with it increasing to mid-single digit in FY26E; 3) all the 11 Para IV filers launching before January 31, 2026 though in a staggered manner; 4) 10% incremental price erosion per generic in FY23E, increasing to 25% incremental price erosion in FY26; and 5) WACC of 10%. Our bull-case upside of Rs40/share assumes settlement terms in line with Alvogen (Exhibit 1-3).

Limited impact on DRL (Buy), Cipla (Buy) and Natco (not rated): We believe Cadila’s settlement has limited impact on the companies which have previously settled their revlimid patent suits with the innovator. This is because 1) all the companies have received volume limited license till now which will limit the market share gains and 2) staggered entry. Both these tactics will lessen the price erosion. Natco (not rated) continues to have the most favorable gRevlimid settlement. We estimate gRevlimid NPV of Rs135/share for Natco based on its settlement terms and profit share of 30% with Teva. Natco’s settlement allows it to capture mid-single digit volume share starting from Mar’22 and gradually increasing to no more than 33% by Jan’26E (Exhibit 4). For Dr Reddy’s Labs, we estimate gRevlimid NPV calculation of Rs330 per share assuming volume share inferior to the Natco settlement but better than the Alvogen settlement (Exhibit 5). For Cipla, we estimate gRevlimid NPV of Rs45/share assuming settlement terms similar to Alvogen (Exhibit 6).

Future gRevlimid settlements to be in line or inferior to Alvogen settlement: Our base-case scenario for Cadila assumes settlement terms inferior than Alvogen because we believe that the innovator would eventually want a market share that is sustainable after January 31, 2026. With 11 Para IV filers, each company, including the innovator, can have a fair share of ~8%, which is roughly in line with the exit volume allowed to Alvogen. Moreover, the patent expiration schedule and patents asserted in the court cases also provide us with a view on strength of the IP situation of each Para IV filer. Of the 11 Para IV filers, only 4 (Natco, DRL, Alvogen/Lotus and Apotex) challenged the innovator’s patents expiring in 2020, potentially allowing them to have better settlement terms. We believe that future gRevlimid settlements will likely be inferior to the Alvogen settlement. Assuming that, we estimate gRevlimid NPV for Sun Pharma (Buy), Lupin (Buy) and Aurobindo (Buy) to be Rs18, Rs80, and Rs65 per share, respectively. None of them currently has any settlement with the innovator; hence, we do not factor in potential gRevlimid NPV to our TP (Exhibit 7-9).

Risk from FTC minimal: While we cannot entirely rule out regulatory scrutiny from the US Federal Trade Commission (FTC) on Revlimid settlements, we believe that the regulatory risk is minimal as all such settlement agreements need to be submitted to FTC once they are finalized.

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