Dr Reddy's Laboratories (DRL) expects an uptake in the second half of 2016 to compensate for the decline the pharma industry has seen in the first half of the year.Sharing his outlook for the year ahead with CNBC-TV18, DRL President and Chief Financial Officer Soumen Chakrabarti said the company should do well going ahead.He said the pharma major, which has had its run-ins with the US FDA, expects a meeting with the drug regulator in June-end. He said that the company recieved "the best possible rating" for its Srikakulam plant in Andhra Pradesh which was inspected by the Australian drug regulator. He said the Australian regulators scrutinised Srikakulam plant closely due to a warning letter by US.Meanwhile, sharing his view on the pharma space, Prashant Nair of Citi told CNBC-TV18 that there has been an increase in regulatory action by the US FDA. He said that towards the end of 2015, a lot of US FDA news got bunched up which spooked the market. He said even though the US FDA scrutiny has increased, the sector saw certain instances of inspections and observations with no escalation. He added that he expects the sector will continue to see certain instances of regulatory action but regulatory issues should not be an overbearing factor for industry, going ahead. Below is the verbatim transcript of Soumen Chakrabarti and Prashant Nair's interview with Ekta Batra on CNBC-TV18.
Q: Tell us what stood out in the phamaceutical sector this quarter.
Nair: There is some pricing pressure probably more than we have seen for the last two-three years and two factors, the channel consolidation effect has been spoken about for some time now by different companies. At the same time, now you are seeing a lot of approvals coming through. So when approvals come through there will be more competition that hits base businesses as well. So there is some incremental pricing pressure for sure and that has had an impact in this quarter particularly for companies who were not able to offset that with new launches or volume gains in existing products.
Q: What are your thoughts in terms of pricing pressure in the US because this quarter sales slowed down to around 12 percent versus what you have done in previous quarters? Was there an element of pricing pressure and your thoughts on FY17-FY18, will it intensify?
Chakrabarti: I agree with Prashant Nair, compared to previous two-three years where there has been some kind of a generic price inflation people were speaking about, in the calendar year 2016, in general there has been a couple of percentage point drop in pricing and particularly if a company is not having enough launch then there will be more effect of the price drop.
Q: You expect an uptick in the second half and if so how much?
Chakrabarti: We expect an uptick in the second half, some of the launches are expected to be there and we hope it will more than compensate the decline in the first half.
Q: One of the reasons why many of the Indian companies have seen slower growth in US also is because of the overhang of the US FDA issues, biggest pharma companies, their biggest plants are under some US FDA issue, your sense in terms of whether the tide however is turning simply because we heard of many of the companies now receiving establishment inspection reports (EIR) and maybe lesser observations than previously than maybe a few months ago, is there a difference?
Nair: I think there has been an increase in the number of regulatory actions or regulatory inspections of Indian plants by the US FDA. The fact that a lot of it got bunched up in a two-three months period, somewhere towards the end of last year, beginning of this year also spooked the street a lot more than possibly warranted to the extent that every inspection or every 483s is now looked at as a disruptive factor, which may not necessarily be the case.
As you mentioned, we have now seen certain instances of inspections, 483s but no escalation and EIRs having come through. So, I think partly yes, the industry is going through a phase where the scrutiny has increased with the FDA trying to align the regulatory oversight of international facilities with what they have in the US and partly it is also just the fact that there is too much reaction given all the negative news flow you have seen in a short period of time.
Therefore, my sense is that you will continue to see certain instances of regulatory action but it won't be out of the ordinary and gradually as we see more inspections, all 483s not leading to any escalation, the reaction to such events will also normalise.
So it is a factor that one needs to keep in mind but it is not the overbearing factor when one looks at the industry in a structural perspective. That will come again from execution ability to launch products, ability to move up the value chain by investing in R&D.
Ekta: We understand that you were supposed to send out your latest reply by around May. Has he latest update gone out and are you ready to re-invite the US FDA to inspect your plant?
Chakrabarti: We have sent an update in the last week of May. So, every two months we have been sending. So, first update was in January end, second in March end and third one we have sent in May end. So, in all likelihood we will seek a face to face meeting with US FDA by end of June.
Ekta: Just to expand a little bit, can you tell us more about the Srikakulam facility. I understand that the Australian regulator gave you all a clean chit just recently. More details if you can share on that?
Chakrabarti: Yes, the Australian regulatory authority spent quite a bit of time there because the US FDA warning letter was there. So, they did it with huge scrutiny, this audit but at the end of the audit they have given us very good rating, the best possible rating one could have expected.
Ekta: And what are the side transfers which are undertaken already for your critical products?
Chakrabarti: We prioritise. We undertook the side transfer activities for the product which we are expecting to launch in FY17 or early FY18. We have completed most of them.
Ekta: What are your thoughts? One regulator says okay, the other regulator says it is not okay, it is a difficult gamble. Does that affect the way you look at a stock at all?
Nair: This is something we have seen in many other instances in the past also where every regulator does not necessarily have the same reading on a plant or on a certain set of issues. So, we try not to read too much into these things. So, what we try to do from our side is when we look at a business where there is some disruption then we try not to take a call on the outcome of the remediation process when we are trying to build forecast and one we build forecast without any meaningful upside from the say, the site coming back or approval coming back from the sites if we still feel that there is value there which essentially means that the street has probably factored in most of the downside. So, we try to look at it that way rather than trying to take a call based on whether some other regulator has - obviously we look at these and it is good sign that a regulator has cleared a plan. But we have generally struggled to predict FDA timelines and outcomes based on such factors. Therefore, we try to avoid that as far as possible.
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