Pfizer's oral Covid-19 drug may hit revenues of Divi's Laboratories

Supply of Molnupiravir to Merck was a key near-term trigger for the stock

The second largest pharmaceutical stock by market capitalisation, Divi’s Laboratories slipped over 6.3 per cent in trade on Monday. The drop was on worries related to the introduction of Pfizer’s anti-Covid oral drug and its impact on Divi’s revenues, weak show of its generic business in the September quarter and expensive valuations.

The negative stock reaction has been triggered by the announcement by US drug giant Pfizer on Friday that its Covid-19 oral drug has reduced the risk of hospitalisation or death by 89 per cent in a clinical trial. This is similar to the oral pill announced by Merck and approved by the UK last week. The Merck drug called Molnupiravir, reduces the risk of hospitalization or death by 50 per cent for patients with mild to moderate Covid, according to the company.

If the Pfizer drug is approved, it will dent Divi’s revenues as it has a supply arrangement for the active pharmaceutical ingredient (API) for the drug made by Merck. The street had been building in upsides from the deal with Merck into Divi’s revenues and earnings. HSBC Global Research had estimated the supply opportunity at $53 million (Rs 392 crore) for FY22 and $44 million (Rs 325 crore) for FY23 from this product. The company had highlighted that there had been some sales of Molnupiravir in the quarter and that it has enough capacity to supply relevant quantities to Merck. The overall oral antiviral Covid market is pegged at $70 billion.

The company posted a slightly lower than expected revenue performance in the September quarter. While overall revenues were 14 per cent higher y-o-y and was led by the custom synthesis (up 42 per cent), the same was offset by the weakness in the generic segment (down 5 per cent). Motilal Oswal Research has reduced its FY22 and FY23 earnings estimates by 2-5 per cent to factor in moderation in generic API prospects over the near to medium term and increased operating expenditure related to expanded capacity.

The revival of the segment will be driven by market share increase in existing molecules by backward integration and new molecule additions from Divi’s pipeline of 16 molecules under various stages of development.

While near term growth driver is expected to be Molnupiravir where sales offtake is unclear, long term growth drivers for the company include capacity expansion in established products, new products where patents will expire over the next two to five years, market share gains in existing products, sartans and iodine-based contrast media products. This will drive a 17 per cent growth over FY21-24 for the company, according to Kotak Institutional Equities.

After the dip in prices, the stock is trading at 44.6 times its FY23 earnings estimates. Analysts at Kotak Research say that valuations fully capture the superior growth in APIs, while ignoring the risks to the synthesis segment over the long term. Investors should await for clarity from Molnupiravir and uptick in the generic segment before considering the stock.