Gradual ramp-up of drug expected through FY22, with US revenues of $25 m; FY22e EPS down 1%; ‘Buy’ retained with TP of Rs 5,533
Workers pour in raw material to product medicine capsules at Dr Reddy's plant in Bachupally, Andra Pradesh state, India, Thursday, April 6, 2006. Ranbaxy Laboratories Ltd., India's largest drugmaker, and Dr. Reddy's Laboratories Ltd., the third biggest, say they plan to make acquisitions in the U.S. and Europe. Photographer: Amit Bhargava/Bloomberg News
Our channel checks indicate API supply constraints for generic manufacturers of Vascepa. Amarin has added EU and China as new markets, thereby committing more volumes to its regular API vendor base. CCSB Taiwan has been the sole/key API supplier for both Hikma and Dr. Reddy’s and is currently facing scale-up challenges. Both generics should gradually ramp-up through 2022 as API supplies scale-up. Cut Dr. Reddy’s FY22e EPS by 1%.
Maintain Buy. 500 tonnes consumed in the US per year, Amarin creating more demand in ex-US markets: Amarin sold approximately 500mn Vascepa capsules in the US in 2020. Amarin has multiple API suppliers for Vascepa. Amarin is now expanding to EU and China which promises to double its API offtake. In this manner, Amarin offers a volume expansion opportunity to its suppliers, which generics will find hard to match with their primary focus on generic conversion in US.
Scale-up challenges at API supplier to generics: Our channel checks show that CCSB Taiwan has been the original Icosapent API supplier to Hikma and
Dr. Reddy’s. Both the generics have highlighted similar issues of API shortage preventing them from scale-up/launch in the market. The exact timeframe to resolution is difficult to estimate although we believe both companies will eventually scale-up during the year 2021, either through a second source or CCSB scaling up successfully.
The API constraint is likely to also affect any other potential generics including Teva and Apotex. Supply chain constraints indicate that Vascepa will remain a limited competition product in the foreseeable future, even after the entry of Hikma and Dr. Reddy’s.
Higher API and conversion cost have kept margins low for Hikma: Hikma has indicated that initial margins on gVascepa are lower than for a typical launch of this type. We believe higher API costs at CCSB and higher conversion costs at Catalent are contributing to lower margins for Hikma. Costs can come down only once CCSB or alternate API suppliers scale-up.
Dr. Reddy’s remains committed to launch, expect gradual ramp-up through FY22: gVascepa remains a key product driving FY22 US revenues. Due to API supply issues, we anticipate a gradual ramp-up through FY22, with Dr. Reddy’s achieving $25 mn revenues in FY22 vs $50-60 mn we had estimated earlier. We cut our FY22 revenue and EPS estimates by 1%/1%, leaving FY23 unchanged.