1. Dr Reddy’s: Regulatory issues overhang valuation

Dr Reddy’s: Regulatory issues overhang valuation

Dr Reddy’s (DRRD) has informed that its oral solids formulations manufacturing plant at Bachupally has received 11 observations from the US FDA post completion of recent audit.

By: | Published: May 3, 2017 4:22 AM
Dr Reddy’s, DRRD, manufacturing plant, FDA, laboratory systems, EPS, US market, Advil gel, Rivastigmine patch, Cytoxan injection, Nuvaring, API plants Dr Reddy’s (DRRD) has informed that its oral solids formulations manufacturing plant at Bachupally has received 11 observations from the US FDA post completion of recent audit. (Source: Reuters)

Dr Reddy’s (DRRD) has informed that its oral solids formulations manufacturing plant at Bachupally has received 11 observations from the US FDA post completion of recent audit. We currently do not have access to the Form 483 issued, but the management has stated that the observations are mostly procedural in nature – reflecting the need to improve people capabilities and strengthen documentation and laboratory systems.

While we believe that the continued regulatory issues might remain as an overhang on the valuations, there is likely to be limited impact on our EPS forecasts as most of our expected incremental launches in FY18E have been filed from partner sites. We believe that the Bachupally plant currently accounts for 18- 20% of sales in the US market. We have not built in any new product approval in FY18E which has been filed from this plant. We highlight that most of our expected launches in FY18E (such as Advil gel, Rivastigmine patch, Cytoxan injection, Nuvaring) are for alternative dosage forms which have been mostly filed from partner sites and some of them consist of ANDAs acquired from Teva.

We highlight that most of our expected launches in FY18E (such as Advil gel, Rivastigmine patch, Cytoxan injection, Nuvaring) are for alternative dosage forms which have been mostly filed from partner sites and some of them consist of ANDAs acquired from Teva. Despite the overhang on valuations on account of few regulatory setbacks , we expect DRRD’s EPS to rise more than 2x over FY17-19E.

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We believe incremental approvals and launches in the US market as well as likely resolution of the pending warning letters, at least at the API plants in Srikakulam and Miryalaguda, could act as short term re-rating catalysts for the stock. Dr Reddy’s is an emerging global pharmaceutical company with focus on the US, Europe, Russia and India. Operating in 40 countries, revenue from international operations has gone up to 84% currently from 40% in FY08. The company’s key strength has been its vertical integration. With a strong research pipeline, its R&D is focused in the areas of cancer, diabetes, cardiovascular, inflammation and bacterial infections.

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