Dr Reddy’s gets green signal for Duvvada unit from USFDA; what should investors do?

Majority of brokerage houses turned positive on the stock, advising buying after the USFDA issued EIR for Duvvada facility.

Pharma major Dr Reddy’s Laboratories, on February 16, received inspection closure report for its Duvvada facility in Andhra Pradesh from the US health regulator. The stock reacted positively to the news and rallied 5 percent in morning on February 18.

The stock was quoting at Rs 2,651.85, up Rs 94.95, or 3.71 percent on the BSE, at 09:22 hours IST.

The company also received a written communication from the United States Food and Drug Administration (USFDA) about the issuance of establishment inspection report (EIR) for FTO VII, the formulations manufacturing facility at Duvvada, Visakhapatnam.

This site was included in the warning letter received from USFDA in November 2015. Subsequently, the site was audited by the regulator in March 2017 for which it received EIR in November 2017, wherein the site’s status remained unchanged, the company said.

The site was again audited in October 2018, it added.

Based on its responses and follow-up actions, the USFDA has concluded that this inspection is ‘closed’ and has determined the inspection classification of this facility as voluntary action initiated.

Majority of brokerage houses turned positive on the stock, advising buying after the USFDA issued EIR for Duvvada facility. In fact, it was a big relief for the stock as it was down 22 percent intraday, on February 15, after Form 483 citing 11 observations by USFDA on the company’s Bachupally plant in Hyderabad pointed at repeat observations.

But the stock recovered through the day to close 4 percent lower at Rs 2,556.90 on February 15.

The four repeat observations are: the quality control unit lacking authority to review production records; appropriate controls not exercised over computers or related systems to assure that changes in master production and control records are instituted only by authorised personnel; the procedures applicable to the quality control unit not in writing and fully followed; and laboratory controls not including a determination of conformance to written specifications for in-process materials.

Brokerage: Edelweiss | Rating: Buy | Target: Rs 3,450 | Return: 35%

The removing Duvvada Unit-VII warning letter lifted a big overhang on the stock as the unit accounts for 20 of 100 products in the company’s pipeline.

Any launches from Duvvada Unit-VII will be incremental news for the stock. Hence, it maintained buy call with a price target at Rs 3,450 apiece.

Brokerage: Nomura | Rating: Buy | Target: Rs 3,478 | Return: 36%

Development at Duvvada would help allay investors’ concerns which were high.

With clearance of FTO (formulations tech operations) 7, FTO 9 site will be inspected by US FDA soon.

Bachupally issues can be addressed by making requisite changes.

Brokerage: Morgan Stanley | Rating: Overweight | Target: Rs 3,197 | Return: 25%

We maintained overweight call on the stock with a price target at Rs 3,197.

With FTO VII clearance, we expect FTO VIII to get inspected soon. Out of total 32 injectable ANDAs pending nod, 15+ are FTO VII & FTO VIII.

But we do not expect meaningful new approvals over next few months from Unit-VII.

Brokerage: Macquarie | Rating: Neutral | Target: Rs 2,648 | Return: 3.6%

Warning letter removal from Duvvada Unit-VII is marginally positive. Approvals including Cyclophosphamide could provide some support to the stock.

The scale up of gNuvaring & gCopaxone is a must for Dr Reddy’s Labs after 11 observations for Bachupally created a fresh overhang.

We await timely resolution of Bachupally & Srikakulam API. Hence, we have a neutral call on the stock with a price target at Rs 2,648.

Brokerage: Motilal Oswal | Rating: Neutral | Target: Rs 2,540 | Return: -1%

We maintain estimates and continue valuing Dr Reddy’s at 18x 12M forward earnings to arrive at a target price of Rs 2,540. The improved ANDA approval pace and the resolution of regulatory issues at Duvvada are the key triggers.

However, we await resolution of issues at FTO-III, which are critical to maintain momentum in the base business. We, thus, maintain our Neutral rating, given the limited upside from current levels.

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