We retain our ‘hold’ rating on the Dr. Reddy’s Laboratories (DRRD) stock. Earnings for the next 6-9 months will remain subdued in our view as the company focuses on remedial work leading to supply disruptions. While the company has a strong R&D pipeline, the facility compliance will overshadow filings/pipeline in the near term in our view.
DRL announced that it has received warning letters for three of its facilities. The warning letter issued to DRRD is a major negative for the company due to two factors: Management had, post 1Q16 results, stated that they have completed the remedial work from their side and are awaiting a re-inspection. The warning letter, however, shows that the FDA considers DRRD’s response insufficient and the company needs to do much more to make the facilities compliant. Warning letters at three facilities indicates a potential risk that the issues are systemic to the company.
Post a facility inspection, FDA gives the Form 483, citing the deficiencies it has found. The company then has to respond and implement corrective measures to address these.
If FDA is not satisfied with the response and the corrective measures, it issues a warning letter, which does not restrict supplies from the plant but it stops any further approvals from the plant.