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Cipla’s Revlimid settlement - a positive surprise

* Cipla’s gRevlimid settlement with innovator Bristol Meyers Squibb (Celgene) on December 11 came as a positive surprise. We raise our TP for Cipla (Buy) to Rs1,000 to include gRevlimid NPV of Rs45/share, assuming that settlement terms are in line with Alvogen.

* Under the settlement agreement, Cipla will be able to sell gRevlimid in a volume-limited manner starting on a confidential date that is some time after Mar’22. After the entry till January 31, 2026, Cipla’s gRevlimid volumes cannot exceed the agreed-upon amount, which is also confidential.

* We also revise our gRevlimid NPV estimate for Dr. Reddy’s Labs to Rs330/share from Rs550 to account for Cipla’s settlement and potential future settlements. Consequently, we lower our TP for DRL (Buy) to Rs5,830 from Rs6,050.

Maintain Buy on Cipla and increase TP to Rs1,000: We increase our TP for Cipla to Rs1,000 to include gRevlimid NPV of Rs45/share. Our base case NPV calculation is conservative and assumes: a) settlement terms in line with Alvogen; b) all the 11 Para IV filers launching before January 31, 2026 though in a staggered manner; c) 10% incremental price erosion per generic in FY23, increasing to 25% incremental price erosion in FY26; and d) WACC of 10% (Exhibits 1-3).

Future gRevlimid settlements to be in line or inferior to Alvogen settlement: Our base case scenario for Cipla assumes settlement terms similar to 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, 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 in line or slightly inferior to the Alvogen settlement. Assuming that, we estimate gRevlimid NPV for Sun Pharma (Buy), Lupin (Buy), Aurobindo (Buy) and Cadila (Hold) to be Rs18, Rs80, Rs65 and Rs40 per share, respectively. Although none of them currently have any settlement with the innovator and hence, we do not include potential gRevlimid NPV in to our TP (Exhibits 6-8).

Maintain Buy on DRL but lower TP: We also refine our base case NPV estimate for DRL to reflect Cipla’s settlement and potential future settlements. Our gRevlimid NPV estimate for DRL is lowered to Rs330/share from Rs550/share, primarily due to higher-than-expected competition leading to higher price erosion. As a result, we lower our TP for DRL to Rs5,830 from Rs6,050. Our DRL NPV estimate assumes volume percentage in-between Alvogen and Natco settlements as we believe DRL’s patent case against the innovator was one of the strongest. In the bull case scenario, assuming DRL’s volume percentage in line with Natco, we estimate that gRevlimid NPV could increase to Rs475/share (Exhibit 4).

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 starting from Mar’22 and gradually increasing to no more than 33% by Jan’26. This is the most favorable settlement and all the future settlements are expected to be inferior to this, in our view (Exhibit 5).

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

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