Doctor Reddy’s Laboratories resilient on US FDA clearance hopes

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Published: March 15, 2017 3:40:00 AM

DRRD announced the completion of an FDA audit for its Vizag facility which resulted in 13 observations.

The Vizag facility is only a marginal contributor to DRRD’s earnings, as most of its key injectable products are manufactured through partner sites such as Cipla or Gland. (Facebook)

DRRD announced the completion of an FDA audit for its Vizag facility which resulted in 13 observations. We await the contents of the form-483 before taking a final call on the severity of the strictures, but we do see delays to a few important products to FY2018. It is to be noted that the two inspectors conducting the operation have historically had a tough track record, with 11 of the 19 issued 483s resulting in import alerts / warning letters, though admittedly, this is only a statistic, and the contents of the 483 that will eventually drive our judgment.

The Vizag facility is only a marginal contributor to DRRD’s earnings, as most of its key injectable products are manufactured through partner sites such as Cipla or Gland. In the near-term, the only critical products that will likely get held up due to potential delays at Vizag are gleevec and melphalan, apart from smaller products such as capecitabine.

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Despite setback to its US pipeline (Aloxi litigation loss), and hits to the existing portfolio, DRRD’s share price has remained resilient, largely due to hopes of first round clearance of these three facilities, and related sharp earnings recovery. However, we highlight that FY2019 earnings already factor in FDA resolution.

We will revisit our estimates once the FDA releases the contents of the 483. DRRD trades at 21X FY2019E, at a premium to front-line peers, despite its business model being the closest to that of a pure play US generics.

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