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Dr. Reddy's Lab
Import Alert: Disappointing,
but OW Thesis Remains
Quick Comment: The FDA has imposed an Import
Alert (detention without physical examination) on DRL’s
Mexico-based manufacturing facility (for chemicals and
active ingredients) for its custom pharmaceutical
business. In effect, FDA has terminated sales (of certain
products) in the U.S. from DRL’s Mexican facility. This is
a follow-up action by the Agency after its site inspection
in November 2010 and Warning Letter on June 3, 2011.
This is the seventh import (tenth facility) alert imposed
by the FDA on Indian generic players, including
Ranbaxy (Sep 2008), Claris (Jun 2010), Ambalal
Sarabhai (Jan 2011) and Aurobindo (Feb 2011) – the
other two are small unlisted companies.
Reason for the alert: The FDA has cited that DRL is not
operating this facility in conformity with current Good
Manufacturing Practices (GMPs). After its November
2010 inspection, the FDA had issued 12 483s (adverse
observations), of which eight were resolved. The import
alert is likely related to the other four pending issues.
Fine print of the Import Alert: This suggests that there
may be some products (naproxen, saquinavir) at this
facility which are exempt from the Import Alert.
According to DRL, these two products account for more
than 50% of the revenues from this facility ($65 mln).
DRL sells roughly half of its production from this facility
to the US and the rest to the EU and other countries.
Implication: We estimate ~25% gross margin for sales
from the Mexican facility for DRL, implying a 3-4%
earnings hit to F12e EPS. However, the situation is not
entirely clear regarding sales of exempt products and
non US sales (which would lower the hit) and fixed
overheads (which could worsen the hit).
Investment thesis: We continue to believe in DRL’s
solid growth story in the quarter ahead (Missing the
Woods for Trees - Staying OW, June 28, 2011), early
signs of IPR creation and inexpensive valuations. We’d
regard a near-term decline as an opportunity to add
exposure.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Dr. Reddy's Lab
Import Alert: Disappointing,
but OW Thesis Remains
Quick Comment: The FDA has imposed an Import
Alert (detention without physical examination) on DRL’s
Mexico-based manufacturing facility (for chemicals and
active ingredients) for its custom pharmaceutical
business. In effect, FDA has terminated sales (of certain
products) in the U.S. from DRL’s Mexican facility. This is
a follow-up action by the Agency after its site inspection
in November 2010 and Warning Letter on June 3, 2011.
This is the seventh import (tenth facility) alert imposed
by the FDA on Indian generic players, including
Ranbaxy (Sep 2008), Claris (Jun 2010), Ambalal
Sarabhai (Jan 2011) and Aurobindo (Feb 2011) – the
other two are small unlisted companies.
Reason for the alert: The FDA has cited that DRL is not
operating this facility in conformity with current Good
Manufacturing Practices (GMPs). After its November
2010 inspection, the FDA had issued 12 483s (adverse
observations), of which eight were resolved. The import
alert is likely related to the other four pending issues.
Fine print of the Import Alert: This suggests that there
may be some products (naproxen, saquinavir) at this
facility which are exempt from the Import Alert.
According to DRL, these two products account for more
than 50% of the revenues from this facility ($65 mln).
DRL sells roughly half of its production from this facility
to the US and the rest to the EU and other countries.
Implication: We estimate ~25% gross margin for sales
from the Mexican facility for DRL, implying a 3-4%
earnings hit to F12e EPS. However, the situation is not
entirely clear regarding sales of exempt products and
non US sales (which would lower the hit) and fixed
overheads (which could worsen the hit).
Investment thesis: We continue to believe in DRL’s
solid growth story in the quarter ahead (Missing the
Woods for Trees - Staying OW, June 28, 2011), early
signs of IPR creation and inexpensive valuations. We’d
regard a near-term decline as an opportunity to add
exposure.
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