Jitters for investors! DRL stock tanks on fear of FDA warning letters

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New Delhi | Published: February 16, 2019 6:17:44 AM

Shares of Dr Reddy’s Laboratories (DRL) nosedived nearly 29% on Friday morning on BSE before settling the day 4.21% lower than its previous close at Rs 2,556.9.

fda, drl, dr reddy's laboratoryThe Bachupally facility, which includes two API units apart from the formulation plant, contributes nearly 30% to DRL’s revenue with significant production exported to the regulated markets.

Shares of Dr Reddy’s Laboratories (DRL) nosedived nearly 29% on Friday morning on BSE before settling the day 4.21% lower than its previous close at Rs 2,556.9, after a research report by Jefferies termed repeat observations by the US-FDA on the drug maker’s formulation plant at Bachupally facility here as “a key negative” and commented that “remediation will take time”.

While many analysts said there wasn’t any need for big worry since the four repeat observations under Form 483 mentioned by the brokerage were procedural in nature, some said the kind of observations were such that they could escalate into warning letters and the company being put on import alert by the regulator. Going forward, the company’s response to the FDA letter would hold the key, they said.

The Bachupally facility, which includes two API units apart from the formulation plant, contributes nearly 30% to DRL’s revenue with significant production exported to the regulated markets.
“The company has huge challenges in terms of manpower having technical expertise to run the FDA-approved manufacturing plants. This has led to the shortcomings and maintenance of the plants as required by the audit committee,” a source said on condition of anonymity. In the recent past, many mid-level managerial cadre have quit the company which has led to shortcomings at the site even while the company was looking at optimising costs, the source added.

DRL did not respond to the queries regarding the nature of observations or the remedial measures taken.

Over the last four years, Indian drug facilities received the highest number of US-FDA warning letters issued to a single country; another leading Indian drug maker Wockhardt was put on import alerts for its three plants in the country for lack of good manufacturing standards, in what hit its exports to the US markets hard.

On February 8, DRL said the US-FDA had completed an inspection at the plant and it was issued 11 observations. Jefferies said the observations are around lack of thorough investigations, lack of details in written records, untrained staff and lack of infrastructure. “While the observations by themselves would have been procedural given the high number of investigations cited and repeat observations, remediation will take time,” said the brokerage. Two of the observations were related the basic facility structure, it said. The brokerage retained its “underperform rating” on the stock with a target price of Rs 2,180 apiece.

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An analyst told FE on condition of anonymity that the company might have been underestimating the regulations and thus ended up getting repeat observations. It might still be working on the remedial measures, he added. This is the second time that the Bachupally formulation plant has seen the FDA’s regulatory action, after it was issued a Form 483 letter in May 2017. During the previous inspection that resulted in a Form 483, the agency also found 11 observations and these were again ‘mostly procedural’. Problems at the site also extended to an API plant which was issued a Form 483 in March 2018.

Over the past few years, there has been an increase in the issuance of Form 483 by the US-FDA that led to Warning Letters.

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