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Dr. Reddy’s US drug products pipeline lucrative but hurdles are aplenty

LiveMint logoLiveMint 01-08-2017 Isha Trivedi

Mumbai: Dr. Reddy’s Laboratories Ltd has one of the strongest product pipelines for the US market among Indian generic drug makers but high risks involved in monetizing this pipeline have kept investors at bay.

So far in 2017, shares of Dr. Reddy’s have declined 22%, while benchmark Sensex index rose 22%. In 2016 and 2015, the company’s stock had fallen by 1.4% and 4.4%, respectively. On Monday, Dr. Reddy’s shares closed down 3.1% at Rs2,385.50 on the BSE, while Sensex closed up 0.6% at 32,514.94 points.

According to Bloomberg data, out of 45 brokerages that have rated the company, 19 have a ‘Hold’ rating, 17 have a ‘Sell’ rating and just 9 have a ‘Buy’ rating.

The company has a big portion of complex generics in its pipeline but given the complex nature of such products, review of the applications by the US Food and Drug Administration (FDA) is stringent and timelines for approval are not always predictable. Delays in approval mean risk of having more competition for the product in the market.

According to a Yes Bank report titled India Pharma: Transitioning to Specialty Generics, Dr. Reddy’s has filed applications for 25 complex generics with the US regulator. The market size for these products is $18 billion.

Quality compliance issues at manufacturing units and litigation relating to drug patents, which leads to delays in product approval and launch, are also key risks for the Hyderabad-based pharmaceutical company.

“Dr. Reddy’s clearly has a strong pipeline of complex products which will allow them to steer a recovery in earnings. However, launches continue to get delayed as manufacturing compliance woes and more intense than anticipated scrutiny of complex assets by the US FDA. We believe there is light at the end of the tunnel but resolution of these woes is critical,” Vishal Manchanda, analyst at Nirmal Bang Securities, said.

The company’s plants at Duvvada and Srikakulam have been under USFDA’s warning letter since November 2015 due to violation of good manufacturing practices and its Bachupally unit was issued a Form 483 in April this year.

Despite the remedial measures taken by Dr. Reddy’s, USFDA found quality lapses at Duvvada and Srikakulam units during a re-inspection earlier this year.

The first quarter earnings were suggestive of the challenges Dr. Reddy’s faces. The company’s consolidated net profit declined 57% year-on-year to Rs66.6 crore in the June quarter. The US accounts for nearly half of the company’s revenue.

With base business (existing products business) deteriorating fast due to increased competition and consolidation of distribution channel and regulatory issues delaying new product launches, growth of the company hinges on timely approval and launch of its complex generics and specialty products filed with the USFDA, analysts said.

ICICI Securities said in a 28 July note, current US pending pipeline of Dr. Reddy’s comprises 99 products, which includes 59 Para IV filings and 26 first-to-file (FTF) products.

The big opportunities for the company include generic versions of Copaxone, Suboxone, and Nuvaring. Dr. Reddy’s said in a conference call with analysts on 27 July that it is expected to receive communication from the USFDA regarding these filings during the fourth quarter of the current fiscal.

The nature of Dr. Reddy’s US product basket (several chunky products) and the company’s high leverage to the US leave it exposed to high competitive risk as the USFDA streamlines its process to approve new generic drug applications, according to a Citi Research report dated 21 July.

“We believe Dr. Reddy’s has one of the better US pipelines among Indian companies, which should play out well over the years. Things also appear to be on the mend on the regulatory front. These give us comfort that downside is limited. On the other hand, the near-term picture remains hazy, given pricing pressure in the US, possible pick-up in competitive intensity in a few of its large baseline products likely Vidaza, Dacogen, and Toprol XL,” the report said.

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