Dr Reddy’s Laboratories gets sell rating by JM Financial

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Published: January 5, 2018 3:25:24 AM

On January 3, 2018, media sources got access to the Establishment Inspection Report (EIR) issued to Dr Reddy’s Duvvada injectables facility in November 2017.

dr reddy, reddy laboratory, dr reddy laboratory,  sell rating, usfda, usfda inspectorsOn January 3, 2018, media sources got access to the Establishment Inspection Report (EIR) issued to Dr Reddy’s Duvvada injectables facility in November 2017. (Image: Reuters)

On January 3, 2018, media sources got access to the Establishment Inspection Report (EIR) issued to Dr Reddy’s Duvvada injectables facility in November 2017, which elaborated on the observations made by USFDA inspectors during the reinspection carried out during February-March ‘17 — highlighting the seriousness of the observations as well as lapses on the management’s part to effectively resolve the issues previously highlighted — which ended in a Form 483 being issued with 13 observations and an Official Action Indicated (OAI) status being maintained. This corroborates our existing view that the EIR doesn’t imply that the facility has been cleared — as is the existing market assumption — and its status remains unchanged and no new product approvals will be granted. Dr Reddy’s is expecting a USFDA reinspection for the Duvvada facility towards end-4QFY18, though resolution could remain a challenge given the presence of repeat observations as well as of similar issues across the three sites that were impacted by the November 2015 warning letter (WL).

We continue to believe all 3 facilities need to be cleared for the WL to be lifted since these were jointly part of a global Corrective and Preventive Action (Capa). We reiterate our ‘sell’ rating on the stock, given the uncertainty on timelines of regulatory clearance of facilities and the significant concentration of FY19-20 earnings contingent on the successful approval/ commercialisation of a few key assets. In November ‘17, Dr Reddy’s had announced it had received an EIR from the USFDA for the Duvvada plant with respect to the facility reinspection carried out during February-March ‘17, which ended in a Form 483 being issued and an OAI status being assigned.

In its stock exchange notification, Dr Reddy’s mentioned that the USFDA had explained in the EIR that the inspection wasn’t closed and the site’s status remained unchanged. In January ‘18, media sources got access to the EIR and reiterated the fact that the Duvvada facility continues to have the OAI status. This confirms our existing view that it has not yet been cleared and thus no new approvals are expected to be granted until regulatory resolution. This possibly explains the negative market reaction (stock price declined 3% in the day’s trading session) to media reports during the day.

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