Dr. Reddy share Price Labs drops 7% as USFDA raises 3 observations for Telangana unit

Dr. Reddy Laboratories (DRL) share price declined 7% following the recent inspection of its Telangana plant by the US Food and Drug Administration (USFDA). The inspection, conducted between October 19 and October 27, 2023, resulted in the issuance of a Form 483 with 10 observations. These observations, ranging from equipment cleanliness issues to procedural lapses, have raised concerns about the company's adherence to quality control standards.

FDA Observations

The USFDA's observations include concerns about unclean equipment, inadequate quality control procedures, deficiencies in determining conformance to specifications, failure to explain discrepancies, and issues with instruments not meeting specifications. These observations highlight the need for improvements in various aspects of manufacturing and quality assurance.

Dr. Reddy's Bachupally unit, where the inspection took place, holds importance as it contributes to 30% of the company's overall revenue from the US market. This facility manufactures four out of the top 10 products for DRL, including Ciprodex, Nexium, Valcyote, and Toprol generic.

Stock performance

Before today's setback, DRL's shares had seen a 6% rise in the past month and a 22% gain in the year 2023. However, the recent decline has brought the stock close to 10% below its record high. Few brokerage firms maintain a sell rating on DRL with a price target of ₹4,766.

DRL's stock has shown a mixed performance throughout the year, with positive returns in six of the twelve months and negative returns in the remaining six. The stock declined 5.6% in December, following an 8% rise in November. Notably, it gained the most in June, rising by 14.6%, and lost in May, declining by 8.7%.

Financial Performance

In the period from July to September, Dr. Reddy's, recorded a 33% increase in its consolidated net profit compared to the same period last year, reaching ₹1,480 crore. Revenue from operations also increased by 9% yoy to reach ₹6,880 crore in the second quarter.

In the same period, Dr. Reddy's reported an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of ₹2,181 crore, a 13% yoy. The EBITDA margins for the September quarter were reported at 31.7%.

Final Words

The USFDA observations on Dr. Reddy's Bachupally unit raise concerns about the company's manufacturing and quality control practices. Investors are closely monitoring the situation, given the unit's contribution to DRL's US revenue. The stock's recent decline reflects the uncertainty surrounding the company's ability to address these observations and maintain its positive momentum in the market.