Maintain ‘Neutral’ on Dr Reddy’s Labs, PT at Rs 2,540 – Motilal Oswal

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New Delhi | Published: February 19, 2019 1:45:11 AM

The USFDA has issued an establishment inspection report (EIR) with voluntary action indicated (VAI) status for Dr Reddy’s lab site at Duvvada.

dr reddy's lab, dr reddy's stocksSeparately, the USFDA had recently issued form 483 with 11 observations to its formulation site (FTO-III) at Bachuppally.

The USFDA has issued an establishment inspection report (EIR) with voluntary action indicated (VAI) status for Dr Reddy’s lab site at Duvvada. This, in our view, comes in as a big positive, given that the site was under warning letter with official action indicated (OAI) status.

We, nevertheless, believe that revenue contribution from this site will be limited over the next 12-15 months, as DRRD had filed products from alternative sites to reduce the business risk when resolution of issues at Duvvada was taking time.

Separately, the USFDA had recently issued form 483 with 11 observations to its formulation site (FTO-III) at Bachuppally. We expect DRRD to take strong corrective and preventive actions (CAPA), given that the facility accounts for a significant 35-40% of the US base business.

We maintain our estimates and continue valuing DRRD at 18x 12M forward earnings to arrive at PT of Rs 2,540. While we find comfort in the improved ANDA approval pace and the issuance of EIR at Duvvada, the resolution of issues at FTO-III is critical to maintain momentum in the base business.

We, thus, maintain our rating ‘Neutral’, on limited upside from current levels. Duvvada was one of the sites being issued a warning letter by the USFDA in Nov’15. The site was again inspected in Mar-17 and issued an EIR in Nov’17.

However, the site’s status remained as OAI. Subsequently, the site was re-inspected in Oct’18, and based on the corrective actions and responses by DRRD, the classification is now changed to VAI.
Consequently, now two (Miryalguda and Duvvada) of the three sites under warning letter have an EIR in place. This would facilitate ANDA approvals from these sites.

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