Divis Labs: Big Void to fill

Divis Laboratories Ltd is engaged in manufacturing Advanced Pharmaceutical Ingredients (APIs), Intermediates, and Nutraceutical ingredients with predominance in exports. It has a market presence in 95 countries and ~14,000 employees and is one of the leading pharmaceutical companies in the world.

Divi’s Laboratories has garnered about 80% of the global market share in Molnupiravir (capsules used to reduce risk of Covid-19) API supplies in FY2022. About $250 million in Molnupiravir API sales in FY2022 was by Divi’s Labs, higher than $200 million earlier.

In sync with Merck’s guidance of manufacturing at least 30 million cumulative courses by CY2022-end Divi’s has supplied API for an estimated 22 million courses in FY2022, In FY23E, Divis is expected to make Molnupiravir sales of about $62 million.

Divi’s Labs remains prepared to produce adequate quantities of Molnupiravir as per clients’ requirements. While it expects Covid drug development to continue as newer Covid variants will need newer drugs.

Divi’s generic API sales remain muted and have declined for three consecutive quarters now on a high base. The company has underperformed cumulative generic API growth of 20 listed Indian peers by 300 bps in 9MFY22.

Compared to its smaller pure-play Indian API peers, which have corrected 34-61% from their peak, Divi’s has corrected 17% from its 52- week high. Compared to the 7% YoY decline in FY2022, a 25% YoY growth in generic APIs is expected in FY2023 led by demand recovery in Naproxen (used in swelling and pain)  and Gabapentin (used to treat nerve pain), and market share gains in contrast to media, sartans, Pregabalin, and Mesalamine. 

Molnupiravir’s offtake in India has been muted with less than Rs.700 million sales in 4QFY22, while its demand has been slightly better in other markets, largely due to its head-start over Paxlovid during the Omicron wave. Paxlovid’s availability is still a challenge in most countries, which can extend Molnupiravir’s run a bit.

As a result, Merck is guiding for $5-6 billion global Molnupiravir sales in CY2022, to add to $952 million in 4QCY21. About $250 million Molnupiravir API sales in FY2022 for Divi’s Labs is expected, higher than $200 million earlier. In sync with Merck’s guidance of manufacturing at least 30 million cumulative courses by CY2022-end (Divi’s has supplied API for an estimated 20-22 million courses in FY2022). As of now, Divi’s has not provided any clarity on its CDMO order book.

Even though a robust ex-Molnupiravir CDMO sales growth is estimated in FY2023/24E, it will be extremely difficult for Divi’s to bridge the Molnupiravir gap. Any meaningful upside from Paxlovid for Divi’s given the uncertain Covid situation and higher competition is not yet seen. Unlike Molnupiravir, which it was working with Merck since the development stage, Divi’s does not have a similar advantage in the case of Paxlovid. 

Even if a sharp recovery in generic APIs is factored in, Divi’s is unlikely to be able to bridge the Molnupiravir gap resulting in a meager 3% EPS CAGR over FY2022-24E. Valuations remain elevated with Divi’s witnessing a much lower derating versus its global peers in FY2022.