Regulatory worries, price erosion may pull down Dr Reddy's US revenues

Dr Reddy’s stock was down over 2 per cent on Wednesday after it received eight observations from the US drug regulator for its formulations manufacturing plant at Visakhapatnam. Analysts say this is a negative as the site was cleared by the regulator in February this year. While the company has indicated it will address the issues raised by the US Food and Drug Administration within the stipulated time frame, the new observations are a major concern. 

Repeat observations for an approved facility are an indication of consistent regulatory challenges for the company, says an analyst with a foreign brokerage. While the company has not given additional details of the observations, analysts believe the same could relate to a slew of products the company filed after receiving the go-ahead for the plant earlier this year. 

If they are product-specific, they might have a short-term impact. But if the same is for the plant, the resolution could take more time, says the analyst. US is the single-biggest market for Dr Reddy’s, which gets over 42 per cent of its revenues from that geography. 

Among the key triggers for the company in the US market was the launch of generic versions of the contraceptive NuvaRing, Copaxone (multiple sclerosis), and Suboxone (opioid addiction). While it was expected that all of them will be launched at the start of 2018-19 (FY19), only the generics of Suboxone were launched in the March quarter of FY19.

In addition to these limited-competition opportunities, higher competition and price erosion will translate into muted single-digit growth for the company’s portfolio over the next few years. 

Price erosion is down to about 5 per cent, from the earlier double digits. The company is launching 10-15 products a year; it has already acquired 42 new drugs recently in the US.

The trigger is the focus on the domestic market where the company is outperforming the overall pharma market. Investors, however, should await resolution of regulatory issues at its plants as well as sustained growth in India before considering the stock.