Dr Reddy's may take six months to resolve issues flagged by US FDA

Compliance norms to keep Dr Reddy's under pressure

Shares of Dr Reddy’s Laboratories shed nearly 30 per cent in intra-day trade on Friday, following a statement issued by the Food and Drug Administration. The US drug regulator indicated in the statement that the manufacturing standards at the company’s Bachupally plant in Telangana were sub-par. However, the stock recovered later in the day.
 
The plant, along with its Srikakulam and Duvvada plants in Andhra Pradesh, is the key supplier of drugs exported to the US market. North America is the single largest market for Dr Reddy’s and accounts for more than 40 per cent of its revenues.
 
The sharp fall on Friday was on account of repeat observations by the US FDA. Five of the 11 observations had been highlighted by the US FDA in inspections carried out in 2015 and 2017, and most of them were regarding the quality control procedures. Observations related to drug contamination, as well as the lack of mechanical devices in drains to prevent back-siphonage from sewers, were some of the major observations by the US drug regulator.
 

In addition, analysts said the Street is disappointed with the firm for not learning from its past mistakes, given it has been unable to resolve issues pertaining to its plants the way its peers have managed. The company has 15 days to respond to the observations, following which the US FDA will inspect the facility to ascertain whether the company has carried out remedial action. Analysts believe the resolution could take about six months. The new observations come at a time when some brokerages seem to be turning positive on the stock after an in-line performance in the December quarter.
 
The positive view on the stock was built on assumptions including the resolution of compliance issues at Duvvada and Srikakulam. The two facilities account for about 15 abbreviated new drug applications (ANDA). The other triggers included the launch of Suboxone (opioid addiction), approval for Nuvaring (contraceptive), and scaling up of operations in China and Brazil to diversify its revenue base.
 
While the company has launched a slew of products in the US and has a pipeline exceeding 100 ANDAs, analysts believe the regulatory overhang will take time to rectify, given the repeat observations. Investors should not bottom fish at these levels and await clarity on the same.