Brief respite for Dr Reddy's, recovery some time away

After a series of regulatory setbacks, Dr Reddy's Laboratories got some respite with its Srikakulam facility getting only two observations by USFDA after a recent inspection. The fact that the company's Duvvada facility inspections a few weeks ago had led to 13 observations, many of which are said to be serious in nature had kept the Street nervous. The stock that had fallen to of Rs 2,560, has seen some recovery and is currently trading at Rs 2,711 levels.

The Srikakulam facility is among the three facilities for Dr Reddy's that had received warning letters. Majority of important filings for US launches by the company are from this plant. Thus reacting to completion of FDA audit at Srikakulam, analysts at Kotak Institutional Equities say that this is a positive outcome. However, they still believe that the facility will take 5-6 months to get a complete clearance.

With the inspections behind it, the attention of Street and analysts will now shift to regulatory clearance of its plants and improvement in profits. For Duvvada plant, clearance is expected to take up to two years, which is not good news as three generic launches including oncology products such as Gleevac are likely to come from the facility in FY18, which now may get delayed. Also remediation costs will rise.

For Srikakulam facility, the clearance may come sooner and this is important for new launches as the existing product range in the US is coming under competitive pressures. The company had said that increased competition in generics of anti-viral Valcyte tablets and injectables franchise, coupled with continuing pricing pressure had led to the decline in US sales. The injectables franchise that had continued to drive growth coming under competitive pressure is a concern. For instance, Decitabine injectables used for treating myelodysplastic syndrome (MDS) had been driving sales. Competition increased with Intas too receiving approval for launch. Increasing generic competition in hypertension control drug Metoprolol is also a worrying factor.

 

Analysts at Credit Suisse say that Sun Pharma's clearance at Halol may impact Dr Reddy's migraine treatment drug Sumatriptan in FY19. This coupled with market share loss in acne control drug Zenatane generics, lower Gleevec generic sales, higher competition in other key drugs lead to a cut in earnings by Credit Suisse. Analysts at the firm cut its FY18 and FY19 earnings estimates by 16 and seven per cent respectively and thereby target prices to Rs 2,300, expecting a rebound in earnings only in FY19.

Kotak Institutional Equities too has given a target price of Rs 2,500 saying that the news of minor observations at Srikakulam will trigger a sentimental rally, but the focus is now likely to shift to FY18 and FY19 earnings, where the outlook as of now remains bleak.