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Dr Reddy's falls 8% as USFDA issues 11 observations for Hyderabad facility

SI Reporter/Mumbai 11 Feb 19 | 11:13 AM

Shares of Dr. Reddy’s Laboratories have slipped 8 per cent to Rs 2,556 per share on the BSE in early morning trade on Monday after the company said the US Food and Drug Administration (USFDA) has issued form 483 with 11 observations for its manufacturing facility in Hyderabad.

“Our formulations manufacturing plant - 3 at Bachupally, Hyderabad by the US FDA, has been completed today. We have been issued a Form 483 with 11 observations. We will address them comprehensively within the stipulated timeline," Dr. Reddy’s Laboratories said in a regulatory filing on Friday after market hours.

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Earlier on April 28, 2017, Dr. Reddy’s Bachupally manufacturing plant had received 11 USFDA observations. The company had in a BSE filing said “these observations are mostly procedural in nature, reflecting the need to improve people capabilities and strengthen documentation and laboratory systems."

On February 2, 2019, the stock of Dr. Reddy’s hit a 52-week high of Rs 2,875, gaining 15 per cent in past three months. In comparison, the S&P BSE Sensex was up 4 per cent during the same period till Friday.

Most of the brokerages maintain ‘buy’ rating on the stock, after Dr. Reddy’s reported a good set of numbers for the quarter ended December 2018 (Q3FY19).

Dr. Reddy’s earnings over the last year have been adversely impacted by competition in some key products and delay in approvals. We are expecting resolution of outstanding regulatory issues and stabilization in the US revenue trend with signs of earnings improvement likely to be a key catalyst for the stock.

“We do expect a pick-up in launches over the next few quarters (not dependent on facilities under the Warning Letter) including some complex approvals in FY20. Growth recovery in the US coupled with the benefit from cost optimization efforts should improve the earnings trajectory over the medium-term. Dr. Reddy’s approval and filings for complex generics underline the company’s focus on transition to growth driven by its niche product portfolio in the US supporting medium-term growth," analysts at JP Morgan said in a company report.

“While Dr. Reddy’s US business growth was muted due to lack of big ticket launches, the increased traction in emerging markets driven by high quality product launches and likelihood of key US approvals in the form of gNuvaring, gSuboxone and gCopaxone helps us maintain our positive stance on the stock," analysts at HDFC Securities said in results review.

The new COO’s cost control initiatives and divestment of non-profitable assets has led to a 400bps YoY EBITDA margin expansion over 9MFY19. DRRD has already achieved Rs 79 core EPS in the first nine months, up 93% YoY. We believe the effect of these measures will continue in the near future while niche product approvals are likely to shoot up profitability further, it added.

At 11:10 am; Dr. Reddy’s was trading 6 per cent lower at Rs 2,614 on the BSE, against 0.49 per cent fall in the S&P BSE Sensex. A combined around 880,000 shares changed hands on the counter on the BSE and NSE so far.

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