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THE setback that Dr Reddy's has suffered in a US District Court in its litigation against Eli Lilly for the launch of a generic version of the latter's blockbuster Zyprexa, which is used for the treatment of schizophrenia, once again underscores the high risk element that accompanies its strategy of challenging innovator patents.

Considering the stretched valuation of the stock and the lack of near-term earnings triggers, we continue to be bearish on the stock and would recommend investors to look for opportunities to trim their holdings.

Dr Reddy's has attempted to address the misalignment between revenues and costs, caused by high R&D and legal expenses, by entering into an arrangement with ICICI Ventures in $56-million deal (in two tranches of $22.5 million and $33.5 million) to cover the filing and legal expenses associated with its abbreviated new drug applications in the FY05 and FY06.

On commercialisation of such products, ICICI Ventures would receive a royalty for a period of five years, the extent of which has not been disclosed.

While such a deal may mitigate the pressure on earnings in the immediate future, other factors such as the intensifying competition in the key generics market of the US, the absence of any big-ticket launch in the near term and the demanding valuation level that the stock trades at, leads us to reiterate our `reduce exposures' stance on the stock.

Nath Balakrishnan

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