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Here’s what analysts feel about Dr Reddy’s Labs post US FDA observations

Chillicious News

Dr Reddy’s Laboratories was in focus on Tuesday after it received observations from the US Food and Drug Administration (FDA).

The US Food and Drug Administration (FDA) issued these observations for its Duvvuda oncology formulation facility. The facility, called Unit-7, is located in Visakhapatnam Special Economic Zone (VSEZ). The site manufactures cytotoxic and hormonal injectables and is an important plant given Dr Reddy’s focus on complex generic filings.

The Unit-7 had received a warning letter in November 2015 for batch failures, a probable microbial contamination and certain lapses quality control procedures.

Typically, the US drug regulator conveys its concerns on manufacturing practices through Form 483. Companies that receive its observations must respond in writing with a corrective action plan and implement it quickly.

Two other major facilities including the API plant (CTO-6) and SEZ formulation facility at Srikakulam will also be coming up for inspection in the second week of April. Srikakulam API facility is also under USFDA warning letter.

Analysts, though, are not very negative on the stock and have largely maintained their buy or neutral ratings barring a few.

CLSA has maintained its buy call on Dr’ Reddy’s Laboratories as it waits for US drug regulator’s action at its Srikakulam plant. The US Food and Drug Administration’s (FDA) inspection result at Srikakulam will be a major catalyst for the stock. It further adds that investors should not compare Duvvuda and Srikakulam inspections due to different compliance requirements. CLSA estimates Duvvuda to be 4-5 percent of the company’s US sales and 2-2.5 percent of total sales.

Jeffries has retained an underperform rating on the stock with a reduced target price of Rs 2,350 from Rs 2,800. It believes the observations at Duvvada are serious and such actions increase the risk of delay in resolution of Srikakulam plant. It has adjusted the estimates for delay in Duvvuda resolution to Q2FY19 and Srikakulam resolution to H2FY18.

Macquarie has a neutral call with a target of Rs 2,950. It believes the resolution timelines may extend beyond earlier assumption. Moreover, the uncertainty over warning letter resolution could be an overhang. It recommends adding the stock on weakness for investors with 12-18 month view.

Bank of America Merrill Lynch (BofA-ML) has reiterated its buy call on the stock with a reduced target price of Rs 3,200 from Rs 3,800. It expects the warning letter resolution to get further delayed, while cutting the earnings per share for FY18-19.

However, it expects strong pipeline to drive US growth despite regulatory setback. Simultaneously, it also sees no further downside to the stock from its current valuations.

Credit Suisse is cautious on the stock as observations at Duvvuda plant are worse than expected. It believes that the chances of escalation are high and approval for Gleevec is now delayed. It is treading with caution ahead of Srikakulam clearance.

Motilal Oswal has maintained its neutral stance with a target price of Rs 2,875. It cut its FY18-19 EPS estimates by 5 percent. It foresees Duvvuda plant to be under warning letter status for 2-3 quarters and sees delay in Gleevec’s approval by 6-9 months.

JM Financial has a sell call on the stock with a target price of Rs 2,400. It has cut EPS estimates for FY18-19 by 19 percent and 18 percent, respectively. It also feels that resolution at Duvvuda is now an event to happen in FY19. “We are of the view that the ominous contents of Duvvada 483 lend themselves to further escalation,” it said in a report. Therefore, it is cutting earnings estimates on high remediation cost, increasing competition and push back of critical launches.