Analysts see delays in resolution of USFDA warning letter to DRL

Drug maker Dr Reddy’s Laboratories on Wednesday got 13 Form-483 observations from the USFDA for its Duvvada oncology formulation facility in Visakhapatnam. The company said it’s addressing the observations raised by USFDA without specifying the nature of these observations. Duvvada plant is an oncology formulation facility called Unit-7 is located in Visakhapatnam Special Economic Zone (VSEZ) and manufactures cytotoxic and hormonal injectables and is an important plant given DRL'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 at its cytotoxic block. Following the letter, Dr Reddy’s completed remediation work and sought USFDA re-inspection.Analysts considered the latest observations as a setback for the company — causing further delay in resolution of the warning letter and blocking hopes of new approvals filed from the facility for US market in the next one year.“We spoke with the company and they conceded that the Form 483 is worrisome as both the number of observations and number of pages are high,” said Edelweiss in its research note.Edelweiss said few of the products filed from this facility and expected to be approved in H2FY18 will have to be site-transferred. “While the company has enough time to site-transfer products, this development is a big disappointment as it essentially delays resolution of the warning letter,” Edelwiess added. Kotak Securities indicated quoting its sources about a possibility of multiple observations around glove integrity SOPs, visual inspections, media fills and incubations among others as possible observations.Kotak also noted that the two inspectors conducting the operation have historically had a tough track record.“The warning letter issued in November 2015 was a combined one for the three facilities with a global corrective action and preventive action (CAPA) and we believe that all the three facilities need to be cleared for the warning letter to be withdrawn. This now raises the probability of FDA clearance slipping to FY19,” Kotak Securities said in its research note. Kotak said the critical products that will likely get held up due to potential delays at Vizag are Gleevec and melphalan, apart from smaller products such as capecitabine.Kotak reduced the target price to Rs 2,500, with a sell rating.DSP Merrill Lynch maintained more nuanced stand on the company saying that it awaits more clarity on the nature of observations to determine the exact impact of any likely delays in the approval of key products.“While overhang on valuations likely to remain, impact on earnings may be limited as many new products filed from other plants,” DSP Merill Lynch said raising the target price to Rs 3,800.“The key, however, is that the observations shouldn’t be repeat observations, a data point we continue to await,” said JM Financial in its report.Other analysts too have indicated a possible delay of approvals from Duvvada plant.“At least 30 percent of DRL's ANDA filings is based on oncology, the delay in resolution of Duvvada facility may hurt the company,” said Surajit Pal, an analyst at Prabhudas Lilladher. As of December 2016, the company had 92 generic filings pending for an approval with the USFDA.Another analyst, Nitin Agarwal of IDFC Securities concurred with Pal, saying that the 13 observations indicate that the company had to do a lot of work on remediation front and logically this will lead to delay in approvals from that plant.Shares of DRL fell 5.01 percent to close at Rs 2,708.60 on BSE on Thursday, while the benchmark Sensex rose 0.09 percent to end 28,929.13 points.