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Sputnik V approval imminent; +ve for DRL, neutral for Cadila

* We believe Sputnik V emergency use authorization (EUA) by Drug Controller General of India (DCGI) is imminent as the Subject Expert Committee (SEC) has provided positive opinion about it. This is positive news for Dr. Reddy’s (BUY) and neutral for Cadila (BUY).

* Given the lack of clarity on the Russian Direct Investment Fund (RDIF) – DRL agreement, and pricing, we have run a sensitivity analysis to quantify the potential upside. Our analysis suggests upside for DRL could range from Rs60-400 per share.

* Sputnik V Phase 3 interim analysis suggests overall efficacy of 91.6%, which is higher than the efficacy of currently available vaccines in India. Given the higher efficacy, we believe DRL might aim for better pricing.

* RDIF has entered into manufacturing agreement with multiple partners in India with a total production commitment of up to 852mn doses. Most of these partners are expected to start production by Q2/Q3 of 2021.

* DRL to benefit from Sputnik V EUA: In Sep’20, RDIF and DRL announced an agreement to collaborate on clinical trial and distribution of Sputnik V vaccine in India. As per the agreement, RDIF was expected to supply 200mn doses (for 100mn people) which was later revised upward to 250mn doses (for 125mn people). The initial supply of the vaccine is expected to come from Russia/South Korea, till domestic manufacturers start production, which is expected in Q3 2021.

* Upside for DRL could range from Rs60/share to Rs400/share: Our bear-case upside of Rs60 per share assumes pricing of Rs150/dose, in line with Covishield and Covaxin, marketing margin of 15% for DRL and opportunity duration of three years. Our bull-case upside of Rs400 share assumes pricing of Rs750/dose as suggested by RDIF, marketing margin of 20% for DRL and opportunity duration of three years (Exhibits 1-2).

* Sputnik V efficacy highest among currently approved vaccines in India: Phase-3 interim analysis suggested efficacy of 91.4% for Sputnik V, which is higher than Covishield efficacy of 63% and Covaxin at 81%. The efficacy of Sputnik V is only slightly lower than Pfizer and Moderna vaccines, which are priced at US$15-20 per dose and are not available in India. The higher efficacy could offer DRL flexibility to price the vaccine at a premium (Exhibits 3-4).

* Supply will not be a limiting factor for Sputnik V: RDIF has entered into manufacturing agreement with multiple Indian companies to bolster vaccine production. These include Gland Pharma (252mn doses), Virchow Labs (200mn), Stelis Biopharma (200mn), Hetero (100mn) and Panacea (100mn). Most of these companies are expected to start production by Q2/Q3 of 2021 (Exhibit 5).

* Potential shift in India’s vaccine preference could benefit DRL and Cadila: We believe the Indian govt. might soon limit the use of Covishield to aged and individuals with comorbidities given the rare but potentially fatal side effect (blood clot). Almost all the developed markets such as European Union, Australia, Canada and the UK have restricted its use to aged individuals. Such a change could create a significant vacuum in India’s vaccination program as Covishield is currently the mainstay due to its higher supply of ~65mn doses/month. This could catalyze uptake of DRL’s Sputnik V and Cadila’s ZyCoV-D.

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