Plant clearance removes overhang for Dr Reddy's

Nod to Bachupally plant raises hopes for clearance of its Srikakulam unit

With the Bachupally formulation plant of Dr Reddy’s Laboratories getting an Establishment Inspection Report (EIR) from the US Food and Drug Administration (US FDA), investors had reason to feel good. The receipt of an EIR marks the end of successful inspections by the US drug regulator. The plant had received 11 observations from the US FDA during its April 2017 audit, raising concerns on the company’s prospects, as its three major facilities have already received warning letters.
 
Since the Bachupally plant, near Hyderabad, accounts for about 55-60 per cent of Dr Reddy’s US sales — and also has the highest number of outstanding filings according to analysts’ data — any escalation of regulatory issues could have compounded problems for the company. That’s because the company’s US growth is already under stress on the back of slower approvals and existing products facing pricing pressure. The concerns were elevated with the German regulator not renewing the Good Manufacturing Practice compliance, or GMP, certificate for the Bachupally plant a few months back. So, the clearance to the plant removes a major overhang for the stock too.
 
The Dr Reddy’s stock, trending lower since July, gained over 6 per cent intra-day on Tuesday, before closing 2.8 per cent higher at Rs 2,285.
 
The nod to the Bachupally facility after two other clearances (EIR for Miyapur and Visakhapatnam in the last one month) also increases hopes that the Srikakulam unit, currently under warning, will also get cleared soon. The Srikakulam unit is an active pharma ingredients (API) unit, and is crucial for the supply of ingredients to other facilities. Approvals for various product launches also hinge on the plant’s clearance.
 

Besides, normalised supply from Dr Reddy’s own ingredient unit can boost its overall profitability. “The clearance of the Srikakulam facility by the end of this year can significantly improve the FY19 outlook for Dr Reddy’s,” says Ranbir Singh at Systematix Shares, adding that the Bachupally clearance will boost Street sentiment, and the valuation multiples the stock commands. The facility’s clearance will improve the approval rate of new products in the US, and can help ease pressure on the company’s US sales.
 
Analysts at Antique Stock Broking say the Bachupally EIR signals an end to regulatory woes for Dr Reddy’s, as they expect the Srikakulam unit to be cleared in the next few months. They remain optimistic on the company’s prospects and say recent limited competition launches, such as Doxil (oncology) and Angiomax (anti-coagulant), should peak in the next couple of quarters, and the US business will be complemented by two to three launches every quarter. The company has a strong pipeline for the US, including complex and limited competition products. The mega generic launches, such as Copaxone (oncology), Nuvaring (birth control), and Suboxone (narcotic addiction treatment), can provide significant triggers for the stock after the clearance of its facilities.