Home / Market / Stock-market-news /  Dr. Reddy’s growth prospects brighten as regulatory concerns subside

Mumbai: Growth prospects for drug maker Dr. Reddy’s Laboratories Ltd, which has seen its earnings profile deteriorate over the last one-two years, have improved due to easing regulatory concerns and expected launch of certain high-value products in the US.

Analysts have turned optimistic on Dr. Reddy’s stock after the US Food and Drug Administration (USFDA) cleared a couple of its manufacturing units, and on the back of good product pipeline for the US and favourable valuations.

According to Bloomberg data, 17 analysts have a “buy" rating, 19 have a “hold" rating and 11 have a “sell" rating on the stock as on 15 December, whereas at the start of 2017, 12 analysts recommended a “buy", 16 had a “hold" rating and 18 had a “sell" rating on the company.

So far in 2017, shares of Dr. Reddy’s have plunged 22%, while the benchmark Sensex has gained 26%. However, there has been a positive momentum in the company’s stock over the last three to four months. On Friday, shares of Dr. Reddy’s ended up 2.5% at Rs2,372 on the BSE, while Sensex closed up 0.65% at 33,462.97 points.

Clearance of the company’s formulations plant at Bachupally, Hyderabad, by the USFDA last week eased fears that the Form 483 issued to the unit in April would be converted into a warning letter and cheered investors as the unit accounts for 50-60% of sales in the US.

On 11 December, the company said it has received an Establishment Inspection Report (EIR) from the USFDA for its Bachupally unit, indicating closure of audit in April when the regulator had issued a Form 483 with 11 observations relating to violation of good manufacturing practices (GMP).

The FDA issues Form 483 if its investigators spot any conditions that in their judgement may constitute violations of the US Food Drug and Cosmetic (FD&C) Act and related Acts.

In June, the US regulator had cleared Dr. Reddy’s active pharmaceutical ingredients (API) unit at Miryalaguda in Telangana, which was one of the three plants that received a warning letter in November 2015 for violation of GMP norms.

The other two facilities that were issued a warning letter are an API plant at Srikakulam and an oncology formulations plant at Duvvada in Visakhapatnam. They are yet to get FDA’s clearance.

On account of the warning letter, new approvals for products filed from these units were held back by the USFDA. This, along with price erosion in generic drugs in the US, hit the company’s earnings.

In financial year 2016-17, Dr. Reddy’s consolidated revenue declined 8.8% to Rs14,196.1 crore, while net profit fell 39.3% to Rs1,292.1 crore. The US market accounts for half of the company’s revenue.

“Dr. Reddy’s has been under dark clouds due to delays in approvals, regulatory overhangs and intensifying competition. We believe these clouds should now be lifting following a big and rising complex generics pipeline in the US. Although the regulatory issues persist, we believe these are already priced in and probability of further escalation is low," Edelweiss Securities said in a note.

Regulatory woes for Dr. Reddy’s are coming to an end with Srikakulam unit also likely to be cleared in the next few months, Antique Stock Broking said in a report, adding that the only overhang remains is a pending warning letter for Duvvada unit.

The company is likely to invite the USFDA for re-inspection of the Duvvada unit in 2018 after completing the remedial measures.

“Dr. Reddy’s is proactively undertaking site transfers of 30-40 critical ANDAs (abbreviated new drug applications) pending approval, in order to mitigate impact of potential delay in regulatory approval due to site related issues. Our positive stance on Dr. Reddy’s is based on approval of high-value products over the next 12-18 months and the impact of cost-control initiatives," Nomura Financial Advisory and Securities (India) Pvt. Ltd said in a note.

The company’s medium-to-long-term prospects are good, given the most visible complex products pipeline among peers with potential launches of high-value products like Copaxone generic, Nuvaring generic and Suboxone generic in the next 6-18 months. Plus, recent launches of limited competition products like generic versions of Doxil and Angiomax, complemented with 2-3 launches every quarter, should help sustain price erosion, the Antique report said.

“We forecast US to grow from $975 million in FY18 to $1.4 billion in FY20 and EBITDA (earnings before interest, tax, depreciation and amortization) margins improving from 18% to 23.8%," the brokerage said.

At 10.51am, Dr. Reddy’s Labs fell 1.30% to Rs2368.35 on the BSE, while the Sensex declined 0.07% to 33,814.61 points.

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