Regulatory woes resurface for Dr Reddy's

Duvvada facility could require second re-inspection by US FDA

The Dr Reddy’s stock lost about three per cent in trade after the German drug regulator issued six major observations for the company’s Duvvada manufacturing facility in Visakhapatnam, Andhra Pradesh. The company will have to present a corrective and preventive action plan to the authorities and when this is approved, it will get a European Union (EU) good manufacturing practices certificate. Though products manufactured at the unit are not exported to the EU and thus there would be no revenue loss, lack of progress on this front is a negative.

Says an analyst at a domestic brokerage, “Given the US FDA issues with three of its key plants, of which only one has been given the go ahead, the observations from the German regulator will signal that the company has not yet sorted out quality control issues at its various plants."

Of the key facilities under warning letters, only Miryalguda (Telangana) received an establishment inspection report or all-clear signal this February. While the company could also see a resolution in FY18 for the Srikakulam facility given that it had only two minor observations in its Form 483 in April this year, two more facilities — the Telangana-based Bachupally (11 observations) and Duvadda (13 observations on re-inspection in March’17) could take longer to resolve, believe analysts at Axis Securities. The Duvvada facility could require a second re-inspection by the US FDA and this is expected towards the end of the year. Given that most of the products exported to the US come from these facilities and the US accounted for 45 per cent of the company’s revenues in the June quarter, a faster clearance for the plants under scrutiny is critical for Dr Reddy’s prospects. “While the company is losing out given the sharp price erosion, a go ahead for the plants will help it to launch new products and cushion the impact," says another analyst at a domestic brokerage.

Though several of its large potential drugs have been delayed or declined, the management has indicated that they will launch two-three new products over the next three quarters. Analysts at Kotak Institutional Equities, however, believe that smaller launches are hardly sufficient to prevent erosion in the existing base.

Thus, how soon the plants become compliant will be the biggest trigger for the stock, which had zoomed 10 per cent on September 1 on positive news flow regarding Dr Reddy's winning a patent issue with respect to a generic version of Suboxone (used for opioid addiction).