The stock of Dr Reddy’s Laboratories surged over 7 per cent on Thursday following the announcement that the company has received an Establishment Inspection Report (EIR) from the USFDA, for its Formulation Srikakulam Plant (SEZ) Unit II, Andhra Pradesh. EIR is a report issued by the Inspector conveying the status whether any action is required or not.
Srikakulam Plant (SEZ) Unit II is a formulation facility which was audited with zero observation by USFDA during May 2017. The EIR received today from the USFDA pertains to the audit conducted in May. Though this formulations facility does not contribute much to its US business, the move will clear the way to new launches of key generics in the US like Nuvaring and Suboxone in the near term. Currently, the company’s US business accounts for 45 per cent of the overall revenue.
The company’s Miyapur, Telangana plant also cleared the USFDA audit without any observations in its Custom Pharmaceutical Services (CPS) facility, and Technology Development Centre (TDC-1) also aided the stock price.
There is a misinterpretation in the market on today’s clearance with that of the API facility in Srikakulam plant. The API facility of the company in Srikakulam plant had received a warning letter from USFDA for the deviation in the Current Good Manufacturing Practices in November 2015. Market had misinterpreted that the warning pertaining to the API facility has been cleared. This issue is yet to be cleared.
Caught in regulatory tangle
Dr. Reddy’s has been facing regulatory hurdles over the couple of years which continues to weigh on the overall performance of the company. Its key facilities – Srikakulam (API), Miryalaguda (API) and Duvvada have been under the US regulatory scanner for a prolonged period of time.
Muted first quarter performance
The stock price has been under pressure for a very long time since late 2015. The stock has plummeted over 48 per cent from its peak of ₹3,689 in July 2016. The first quarter (Q1 FY 2018) results with disappointing results and gloomy growth outlook dragged the stock price to a low of ₹1,901 in August this year. The stock prices have however recovered from this low and is currently trading around ₹2,486.
The company reported a 56.6 per cent drop (year-on-year) in its consolidated net profit (₹66.6 crore) in the first quarter (Q1 FY 2018). The pricing erosion in the US and destocking due to goods and services tax (GST) implementation in the domestic market were the major causes citied for the disappointing results. Cautious commentary made during the earnings call also dampened the sentiment of the investors.