Home / Markets / Mark To Market /  The shadow of Form 483 over Dr Reddy's stock

Investors anxious about the nature of regulatory observations related to Dr Reddy’s Laboratories Ltd’s Duvadda plant can perhaps breathe easy now. An analysis of the observations listed under US Food and Drug Administration’s Form 483 by brokerages now reveals no data integrity issues. In addition, there are no repeat observations.

The company’s sterile injectables manufacturing facility at Duvadda, Visakhapatnam, is critical for its US supplies and future approvals. At the end of October, the site was issued a Form 483 that had certain observations. Dr Reddy’s said it would respond and address the issues in the stipulated time. It is, however, worth noting that any severe, repeat, and unresolved observations can lead to escalation of the issue and potential disruption of supplies.

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Analysts at Nomura Research said, “As a base case, we expect Dr Reddy’s to address the observations to the satisfaction of the regulator and hence do not expect an escalation." However, analysts at Edelweiss Securities Ltd are cautious as they see microbial contamination as the single biggest risk. They reckon that while there are no data integrity issues, OAI (official action indicated) remains a possibility resulting in a re-inspection and 9–12 months of remediation timeline.

Hence, till the plant receives a complete clearance, there may be some overhang on the stock. Accordingly, the company had changed its strategy towards the US market, including divesting some of its proprietary loss-making products.

US growth during the first half of this fiscal, though, remained soft due to pricing pressures in the base business. But analysts remain positive about the strong product pipeline. The generics of Revlimid, already launched in Canada, can provide strong impetus after the launch in the US, given the product’s large size. In addition, the long-term growth pipeline is being strengthened by the company’s investments in injectables, biosimilars and other products.

Analysts at Motilal Oswal Financial Services estimate 24% earnings CAGR (compound annual growth rate) over FY21-23, led by sales CAGR of 13% in the US, 16% in domestic, and 21% in Europe. Covid-related opportunities such as Sputnik V in other countries (ex-India) and molnupiravir could act as potential triggers over near-to-medium, they add.

Year to date, Dr Reddy’s shares have underperformed the broader Nifty 100 index.

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