Dr Reddy's hit by FDA warning, shares fall 15 percent

By Zeba Siddiqui

MUMBAI (Reuters) - Dr Reddy's Laboratories Ltd, India's second-largest drugmaker, has received a "warning letter" from U.S. regulators over inadequate quality controls at three manufacturing plants producing drugs for cancer and other diseases.

The warning is the latest in a string of incidents that have hurt the industry's reputation and slowed its growth in the world's largest drug market, where India supplies more than 40 percent of the generic and over-the-counter medicines.

Dr Reddy's said the FDA warning meant it would not receive U.S. approvals for drugs made at the plants until it fixed the problems, a blow for business at a company which relies on the United States for a majority of its sales.

The affected plants account for more than 10 percent to 12 percent of the company's sales.

Dr Reddy's said a production halt may not be required, but the news caught investors by surprise, sending shares to their lowest in four months.

"We are probably looking at flat to declining earnings in FY 2017, while earlier we were expecting growth," said analyst Nimish Mehta, founder of Research Delta Advisors.

Analysts warned the move by the U.S. Food and Drug Administration would hit U.S. sales for at least the next two years, as the launch of key products may be delayed.

"There is no indication in the warning letter that we need to stop manufacturing, but we will be examining the contents and deciding our strategy," Dr Reddy's Chief Finance Officer Saumen Chakraborty told Indian television news channel ET Now.

The FDA inspected the company's Srikakulam, Miryalaguda and Duvvada drug manufacturing sites in November, January and February, and almost immediately issued initial notices asking the group to rectify some problems.

But it was unable to fix the issues to the satisfaction of the FDA, and was hit with a warning letter. Such letters are issued by the agency when it finds a manufacturer has "significantly violated" its regulations.

"We had absolutely no idea it could escalate to this level," said Siddhanth Khandekar of ICICI Securities.

DATA RECORDS

Dr Reddy's said the agency's concerns with the plants related to quality control procedures and how data was recorded. It did not provide details.

The FDA has already banned plants of other Indian firms, such as Wockhardt Ltd and Ranbaxy Laboratories Ltd, a unit of the country's largest drugmaker Sun Pharmaceutical Industries Ltd, after finding faulty, fudged or incomplete data records in recent years.

Both companies have been unable to get their plants cleared by the agency, more than two years after the bans.

But analysts say the FDA considers data integrity issues to be the most serious, typically requiring at least two years to be remedied to its satisfaction.

Dr Reddy's Chief Executive G V Prasad said the group was revamping its quality systems as a result.

The FDA has increased the number of inspections of foreign plants supplying to the United States over the past year, exposing quality control issues at several Indian drugmakers. India plants of multinational drugmakers, such as Novartis and Mylan, have also come under fire.

Industry executives say they have been improving their manufacturing and systems, but sanctions continue.

Dr Reddy's makes drug ingredients at the Srikakulam and Miryalaguda plants, and cancer medicines at the Duvvada plant.

(Reporting by Zeba Siddiqui in Mumbai; Editing by Anand Basu and Clarence Fernandez)