Dr. Reddy’s Warns US Market ‘Unpredictable’ As Q4 Profit Below Expectations

The last financial year was “particularly bad” for Dr. Reddy's Laboratories Ltd., chief operating officer Abhijit Mukherjee told analysts in a conference call after the release of the Indian firm’s fourth-quarter results, which missed market expectations.

The company had no “significant” new product launches amid ongoing US regulatory quality control issues, and cut-throat pricing competition drove down sales in its main US market, he said.

There is also no certainty about the outlook for the coming year for Dr. Reddy’s, headquartered in the southern Indian city of Hyderabad, as a “lot will depend on how North America really plays out,” Mukherjee said May 12. “The US will continue to be dominant and the most unpredictable in many ways…depending on launches, depending on approvals, depending on resolution” of US Food and Drug Administration actions, he said.

Still, the company believed it should be able to deliver “10-plus launches in the next 12 months,” he added.

Net profit for the final quarter of the fiscal year to March 31, 2017 jumped nearly three-fold to INR3.4bn ($52.6m) from a year earlier. The bottom line was flattered by a low base, stemming from a large one-off charge in the same year-ago period stemming from payment losses involving its Venezuela operation. But the net profit figure still came in far below analysts’ forecasts of around INR4.2bn.

Total revenue for the quarter fell 5% to INR35.5bn from a year earlier, dragged down by a 19% slide in North America generic sales.

No Big Approvals

“All the products which received product approvals last year were very, very small. Two to three big ones - that really makes a business difference - but basically there were no big ones last year,” a senior Dr. Reddy’s executive, who asked not be named, told Scrip.

“The US will continue to be dominant and the most unpredictable in many ways” – Dr. Reddy’s COO Abhijit Mukherjee

The company said it was working with the US FDA to resolve issues involving product approvals and a three-plant warning letter issued in late 2015 that have crimped revenues.

“We remain optimistic about eventual approval of new launches for the coming fiscal,” Mukherjee said. But “the timeline for review of complex products and the subsequent approvals [from the FDA] have been getting deferred,” he said. With the generic space becoming increasingly crowded, Dr. Reddy’s has been developing complex generic drugs in such areas as injectables, eye-drops and topical medications to stay competitive.

Despite the company’s cautious tone, investors drove up Dr. Reddy’s shares by 3.36% to INR2, 667.50 on May 15, on the back of analysts’ suggestions that the stock had become undervalued since retreating from a record high of INR4,382.95 touched on Oct. 20, 2015, just before the FDA’s concerns with the company surfaced.

Sentiment ‘Bottoming Out’?

JP Morgan, which set a price target of INR3,400 and assigned an “overweight” rating to the company, was especially upbeat. “Overall we could see sentiment bottoming out on the stock with improvement in approvals key for earnings visibility and stock re-rating. News flow related to the status of other facilities could also be near-term triggers for the stock,” JP Morgan said in a noteIndia’s HDFC securities, which had a “neutral” rating and a target price of INR2,685, expressed more muted expectations. ”With no substantial launches lined up over the next few quarters and lingering regulatory issues, we expect only around 12% CAGR in the US business, and 11% CAGR in the overall top line over FY17-19E,” HDFC said.

Aside from what one company executive called “unprecedented price erosion” in the US, Dr. Reddy’s other problems relate to its struggle to bring three of its key drug factories located in southern India into compliance with US manufacturing quality standards. Back in November 2015, the FDA issued a warning letter to the company over quality control issues at the sites - Duvvada, Miryalaguda and Srikakulam - that together account for 10-12% of sales.

Fixing the issues has drained profitability and constrained supplies to the US market. The problems have also meant that new product approvals at the plants – two API sites and one oncology formulation factory – have been put on hold until inspectors give the all-clear. The company hired outside experts to help bring the plants up to scratch but on re-inspection, FDA inspectors found new problems.

Plant Inspections, Problems

Last month, the FDA also detected lapses at a fourth plant, Bachupally, which accounts for 40-45% of sales, and slapped it with a Form 483 listing potential quality system problems.

“We have given our response to FDA with timelines committed to action. We are working on that,” Dr. Reddy’s co-chairman G.V. Prasad said, adding that the company would continue to focus on building a “sustainable quality culture across the organization.”

Mukherjee indicated that the company was not overly worried by the FDA’s 11 observations about its Badhupally plant, describing them as “procedural” in nature.

The Indian drug industry’s run-ins with the FDA have become chronic, with headline-grabbing reports of water leaking through roofs and being collected in buckets at factories, documents being shredded at night and drug testers throwing out bad results. Not only is Dr. Reddy’s in trouble with the regulator, other big names ranging from Sun Pharmaceutical Industries Ltd., to Lupin Ltd. and Wockhardt Ltd. have run afoul of FDA inspection teams.

In fact, the Dr. Reddy’s executive, who spoke off the record, said the rigor of the FDA’s plant inspections has intensified for the sector lately. “They’re asking tough questions - not only to find out what has gone wrong but what can go wrong. They have raised the bar - it’s something we’re all facing as an industry but it’s going to take time before the entire process is foolproof,” he told Scrip.

Dr. Reddy's was expected to start selling a generic version of Novartis AG's leukemia blockbuster Gleevec (imatinib mesylate) during the second half of the last fiscal year from a “partner site” when it could not ship the product from its own plant. But that plan had to be shelved when the partner also received an FDA notice, the Dr. Reddy’s executive said.

Analysts say the delay in Dr. Reddy’s launch of a copycat of Gleevec and the entry of rival generic versions into the market will make it a smaller-sized sales opportunity for the company than originally anticipated.

New Filings, Markets

During the fiscal year, the company filed 26 abbreviated new drug applications (ANDAs) with the FDA, of which 13 were filed in the fourth quarter. As of March 31, the company had 101 generic filings pending approval with the FDA - 99 ANDAs and two new drug applications (NDAs). It said 21 had first-to-file status. The company said the products could be made at other locations if its own plants could not be used when approvals came through.

Aside from North America, other geographies delivered “good performances, with several new product launches. We are also seeing expanded global access to our biosimilars, as a result of successful registrations in emerging markets," co-chairman Prasad commented. Branded generics performed better too, especially in Russia, helped by a strong ruble.

The company is renewing its focus on China and is in the process of filing several oncology products that will make the Chinese market “very substantial for us in three to five years,” Mukherjee said. Dr. Reddy’s has also entered Columbia, Brazil, France, Italy and Spain markets and is set to go to Chile and through partnerships to the ASEAN region, he said.

“In other markets [aside from the US], we expect a clearly northward result [in the next fiscal year], emerging markets and biologics have more and more traction, India should deliver 10 to 12% revenue growth…and our Europe business is well placed to deliver growth,” he said.

From the editors of PharmAsia News.