US FDA’s action may lead to no new active pharma ingredients approvals from the sites under regulatory lens, which may slow down the company overall bulk drug business growth
HYDERABAD : Going by the strongly-worded warning letter of the US Food and Drug Administration and seriousness of its observations, analysts fear it could take 1-3 years for Dr Reddy’s Laboratories Ltd to resolve the issues raised by the regulator, while fears of an import alert is hanging on its head. “The probability of an import alert cannot be ruled out, and we see timelines for resolution getting pushed out to 2-3 years,” Kotak Institutional equities said in its note downgrading the stock to ‘REDUCE’.
On Nov 5, US drug regulator has issued the warning letter to Dr Reddy’s on violation of good manufacturing practices at three of its units located in Andhra Pradesh and Telangana. FDA raised several questions on quality, testing, data management and existence of one uncontrolled quality-testing lab. US FDA initially asked the Dr Reddy’s to submit its response within 15 days initially, but extended the deadline till Dec 7.
“We believe the speed with which Dr Reddy’s is able to resolve these issues with the FDA is going to be critical,” Motilal Oswal said, adding that it is unlikely that the company may resolve the issues before 2017-18.
Sales contribution from these facilities to the US market is 10-12% of total sales approximately a $250 mln, a major concern to look at, Motilal Oswal said downgrading the stock to ‘Neutral’.
“We are concerned about the nature of some of the observations highlighted in the letter, and believe that the resolution of these issues could take some time, more than 9-12 months,” ICICI Securities said. Motilal Oswal said the remedy plan may incur additional cost and time to get the facilities to make fully FDA complaint and it may have risk of supply disruptions.
“Dr Reddy’s will have to comprehensively evaluate the recorded and reported data and to assess quality risks associated with the current failures. This may involve processing and evaluating a large volume of data. Therefore, we expect resolution could take more than 12 months which was our initial estimate,” Nomura said.
While most of the analysts fear the FDA warning letter may lead to a possible import alert on these three units, Nomura says import alert risk for Dr Reddy’s is low.
“Based on the reading of the warning letter and development so far we believe that the chance of an import alert at the facilities is low, although the resolution could be a time consuming process,” Nomura said.
Nomura said the FDA has raised concerns on the company’s data management practices but the warning letter does not raise questions on the integrity of data generated by Dr Reddy’s at these locations. Analysts sees the impact of US FDA action may lead to no new active pharmaceutical ingredients approvals from the sites under regulatory scanner, which may slow down the company overall bulk drug business growth.
While there may be market share loss for some of the products, Dr Reddy’s will undertake site transfers to minimise the impact, analysts said. -Cogencis
