Triggers falling in place for Dr Reddy's

As facilities get US FDA nod, pace of product launches will improve

A go-ahead from the US Food and Drug Administration (FDA) for its Miryalaguda plant in Telangana could trigger the start of a new approval cycle for Dr Reddy’s Laboratories. The plant, one of three under the FDA scanner, was inspected by the latter in February, with three observations. It was recently issued an Establishment Inspection Report (EIR), which marks the end of successful inspection. And, could indicate the company is close to solving issues related to the earlier warning letter.

The event also raises hope that the company’s larger Srikakulam facility, in Andhra that had also not received any material observations after recent inspections, could see faster resolution. Both are Active Pharmaceutical Ingredients facilities. The third one at Duvvada in Andhra, which had a warning letter issued to it, makes formulations. Though Miryalaguda contributes two per cent to the company’s US revenue, Srikakulam and Duvvada contribute 9-10 per cent, with a major share from Srikakulam. Analysts feel clearance of the Miryalaguda facility might not immediately lead to a major earnings upside. Even so, since ingredients from the site will be used by many formulation facilities, growth could be fuelled from there. The stock gained 1.4 per cent on Wednesday.

The three plants got FDA warning letters in November 2015 and saw fresh inspections this year. Duvvada had received observations of a serious nature. This and weak March quarter performance had led to the stock touching 52-week low last month. From its high in February, the stock lost about a quarter of its value before a recent recovery. The resolution of regulatory issues, thus, holds key to Dr Reddy’s prospects. Analysts had cut their earnings estimates, primarily due to the regulatory concerns. While the company has a strong pipeline of products and 60 per cent of these are complex generics, the delayed launches are impacting growth. For instance, opportunity for launch of a large oncology product, Gleevac generics, has been lost, with approvals getting delayed. It’s already a multi-players market now.

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However, there are opportunities such as a generic version of multiple sclerosis drug Copaxone. Clearance of the Srikakulam plant will be vital for monetisation of the opportunity in FY19. Ranbir Singh at Sytematix Shares says he is watching the events before upgrading of ratings. He is factoring in a resolution of FDA issues during FY18 and thus expects earnings growth in FY19 to get a boost. The normalisation of operations in itself is a big trigger for Dr Reddy’s, as approvals and launches can catch up later.