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Dr Reddy's tanks 10% on USFDA warning: How to trade now?

Bank of America Merill Lynch maintains underperfom rating as it feels complete resolution may take 12-18 months. It remains remain cautious on factors such as higher product concentration risks in the US potential, competition in key products and limited pipeline visibility.

November 26, 2015 / 01:36 PM IST
 
 
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Shares of Dr Reddy's Labs slumped 10 percent intraday on Thursday after US Food and Drug Administration (USFDA) released details of the warning letter issued to the pharma major. The warning letter was issued after inspection of three Dr Reddy’s facilties- unit VI of Srikakulam Plant, unit V in Miryalguda Taluk, Telengana and unit VII in Duvvada, Vishakapatnam.


In a strongly worded letter, the regulator said that several violations are recurrent or represent long-standing failures and it is apparent co has not implement a robust quality system at the sites. The stock has already lost around 25 percent in November month. Most recently, the Hyderabad-based company was caught in a probe concerning possible violation federal security laws. Lundin Law PC is investigating claims against Dr Reddy’s Laboratories concerning possible violations of federal securities laws.


So, how to trade Dr Reddy’s now?


Bank of America Merill Lynch maintains underperfom rating as it feels complete resolution may take 12-18 months. It remains remain cautious on factors such as higher product concentration risks in the US potential, competition in key products and limited pipeline visibility.

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CLSA also maintains underperform and thinks resolution likely to take atleast 18-24 months. According to it, DRL’s response letter to warning letter would be crucial and its ability to site transfer will be key to US sales for FY17.


JM Financial has downgraded the stock to sell with a target price of Rs 2750 per share and slashed FY17/18 estimates by 24 percent, 20 percent respectively.


Retaining a neutral rating, Credit Suisse has lowered target price by 10 percent to Rs 3600. It says possible approvals from other plants may be impacted until DRL submits a third party risk assessment. It feels next key catalyst for the stock is getting new approval from FDA.


Citi also has a neutral rating as a warning letter points to a long haul. it advises caution despite recent correction, adding that observations about uncontrolled custom lab and recurrent violations are particularly worrisome.


However, few analysts are still positive on the stock. Nomura maintains a buy rating stating that the stock correction more than factors in the risk while chances of import alert are low. "The FDA has raised concerns on the company’s data management practices. However, the warning letter does not raise questions on the integrity of data generated. We maintain that Dr Reddy’s has possibly avoided the worst outcome, an import alert," it says in a note.


According to Nomura, key risks include delays in approvals for high-value products in the US, regulatory action at Srikakulam or any other key facilities supplying to the US market and adverse currency movements.


Hoping on to the positive bandwagon is Macquarie which is bullish on its positive long term outlook of company. Though it agrees that risks could pressure valuations in near term but any disproportionate correction could be an opportunity to add with a 12-18 month view.


At 10:30 hrs, the stock was at Rs 3179.65, down 6 percent on the BSE.

Posted by Nasrin Sultana
Follow @NasrinzStory

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