Shares of Dr. Reddy’s Laboratories rallied nearly 4% in opening trade on Wednesday after the domestic brokerage Nuvama upgraded the pharma heavyweight to ‘BUY’ from ‘REDUCE’, citing the company’s strategies to mitigate the impact of Revlimid patent expiry. Revlimid patent expiry in 2026 poses a significant threat to Dr. Reddy's earnings growth as the drug contributed 40% to its FY24 EBITDA.

Dr. Reddy’s Laboratories shares gained as much 4% to hit a high of ₹1,404.60 on the BSE, while the market capitalisation crossed ₹1.15 lakh crore. Early today, the pharma stock opened higher for the second straight session at ₹1,370.90, up 1.5% against the previous closing price of ₹1,350.75.

At the current level, Dr. Reddy’s shares trade close to its 52-week high of ₹1,420.20 touched on August 21, 2024. It hit a low of ₹1,104.69 on January 18, 2024. In the last one year, the counter has risen 20%, while it added over 5% in six months; and nearly 10% in a month.

Nuvama in its report says that key asset launches such as Semaglutide in Canada and the Abatacept biosimilar in the U.S. are expected to largely offset revenue and EBITDA losses from the Revlimid patent expiry. Adding to it, the company’s plan to launch critical generic drugs in North American markets, such as  gVenofer, gInjectafer, gSprycel, gPremarin, Denosumab biosimilar, Lanreotide, gEntresto, gJakafi, etc, to mitigate losses.

“We reckon DRL’s proactive measures shall mitigate about 80% of the expected EBITDA impact. That implies a favourable risk-reward, in our view; we value the stock at 24x FY27E EPS, yielding a TP of ₹1,553; upgrade to ‘BUY’ (from ‘REDUCE’),” the brokerage says in the report.

The report highlights that investors are concerned about the company’s earnings growth after Revlimid goes off-patent. “The company has increased organic spend on developmental assets and taken inorganic steps: acquisition of NRT business, vaccine distribution agreement, etc. We reckon the R&D spend would decrease in FY27, which would soften the impact on EBITDA from Revlimid expiry.”

The brokerage says that the launches of key assets can help Dr. Reddy’s fully offset the Revlimid impact on revenue and 80% of the impact on EBITDA. “Margins could stay at levels within management’s guidance—beating our earlier estimates.” 

As per the report, failure to get product approvals in time will be key risk for the company. Dr. Reddy’s plans to launch Semaglutide in Canada by January 2026, and the Abatacept biosimilar in the United States by FY27.

Semaglutide is slated to be launched in Canada by 2026, with peak revenue of $250-300 million. Dr. Reddy’s has backward integration in this drug, and its early experience in this market can aid strategies for markets wherein Semaglutide loses patents in 2026.

In case of Abatacept, the phase III trials for the biosimilar is underway. Abatacept is a fusion protein without any biosimilars competition despite expiry of the fundamental patents of the molecule. This drug is expected in Q4 FY27; however, manufacturing facility clearance is critical for approval. Post-launch, assuming 30% erosion and a 25–30% market share, the company may generate $500–600 million of peak revenue from this drug (we reckon $41mn in FY27E), says Nuvama.

The report also notes that the company has gained ranks in India and can benefit from vaccine distribution, the Nestle JV and field force expansion. India business has near-to-medium tailwinds in the form of MR productivity. Russia has a strong RoE profile and can benefit from the Galvus distribution agreement; meanwhile, China can benefit from approvals and facility expansion.

“In all, the three businesses have growth levers for a few years. Plus, DRL’s FY26E cash flow of ₹6,000 crore can be utilised to add more growth drivers,” it adds.

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