US FDA warning poses threat to Dr Reddy’s revenue outlook

Mumbai: Dr. Reddy’s Laboratories Ltd, India’s second-largest drug maker, could see its sales come under pressure as it faces scrutiny from the US Food and Drug Administration (FDA) over manufacturing practices at its factories.

The generic drug maker plunged 15% in early November after it received a warning letter from the FDA over potential violations at three facilities. The stock accelerated its declines on Thursday after the US agency posted the letter online, detailing problems with quality control and actions by workers that compromised the sterility of products.

Since the beginning of the month, analysts have cut their estimates for the company’s sales in the fiscal year ending March 2017 by an average of ₹ 500 crore according to 39 estimates compiled by Bloomberg. They cut their estimates for fiscal year 2018 by an average of about ₹ 800 crore.

“We feel that these are very grave observations, and this may take a little more than one year to resolve,” said Amey Chalke, an analyst at Motilal Oswal Securities Ltd in Mumbai of the FDA’s letter. “Previously our estimates were building for a one-year delay. Now we are expecting that this may take more of a two-year time frame.”

Dr. Reddy’s dropped 8.5% on Thursday, making the stock the worst performer on the Bloomberg World Pharmaceuticals Index over the past five days. Shares have tumbled 28% in November, heading for the worst month since January 2008.

Motilal Oswal on Thursday cut its sales estimate for fiscal year 2017 by 4.2% to ₹ 17,500 crore and downgraded the company’s shares to neutral. The warning letter posted online also said that the FDA had found a quality control laboratory that was “previously unknown to FDA.”

The warning letter means that Dr. Reddy’s will have to revamp its manufacturing facilities to meet FDA standards, and future approvals for products made at those sites could be withheld until the regulator’s concerns are addressed.

It also increases the chances of an import alert, or ban on exports from the three facilities into the US, according to a note published on Thursday by Morgan Stanley analysts Sameer Baisiwala and Vaibhav Dusad. They cut their sales estimates for fiscal year 2017 by 4.7% to ₹ 17,600 crore.

Dr. Reddy’s larger rival Sun Pharmaceutical Industries Ltd is working to address FDA concerns about manufacturing practices at its Halol facility, and resolve export bans on four facilities belonging to its subsidiary Ranbaxy Laboratories Ltd.

The FDA has banned imports of drugs from more than 30 plants in India since 2013, after the agency boosted inspections using fees it charges drug makers to review their products.

Dr. Reddy’s has not been told to stop manufacturing or shipping products from the three sites, the company said in an e-mailed response to questions. It is in the process of responding to the FDA’s letter and is taking “various actions to raise the bar of our quality management system at an organization-wide level.”

“We are hopeful that our actions and responses will address all concerns raised by the US FDA.” The company declined to comment on the percentage of revenue contributed by the three sites. Bloomberg