Retain ‘buy’ on Dr Reddy’s Laboratories and assign a target price of R 4,919 per share, valuing the stock at 23x our FY17-18f average EPS forecast of R214. The stock currently trades at 21x FY16F and 18.7x FY17f estimates.
The US FDA made public the warning letter issued to Dr Reddy’s after the inspection of the three manufacturing facilities in India. The FDA evaluated the company’s initial response after the inspections and acknowledged receipt of subsequent responses.
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 note that warning letters issued to plants which in the past received an import alert, specifically mentions the concerns over data integrity. Warning letters to Sun Pharma’s Karkhadi facility, Wockhardt’s Chikalthana and Waluj facilities, Canton Lab’s Vadodara facility explicitly raise the issue of data integrity.
Both in the case of Sun Pharma and Wockhardt, the FDA suggested appointing data integrity experts which is not the case in this warning letter. Further, analysis of import alerts issued over the past two years suggests the average time to the enforcement action from the date of inspection is approximately six to eight months and in many cases it is enforced prior to the issue of a warning letter.
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