MOSL: DR REDDY’S LABS (Neutral)-German regulator issues observations at Duvvada facility-No supplies to EU from this facility

​Dr Reddy’s Labs: German regulator issues observations at Duvvada facility; No supplies to EU from this facility; hence, no revenue impact

(DRRD IN, Mkt Cap USD7.8b, CMP INR2159, TP INR2400, 11% Upside, Neutral)

• The German regulator conducted an audit on DRRD’s Duvvada-based Oncology injectable formulations facility. The regulator has issued six major observations post inspection of this facility. DRRD will be submitting a corrective action plan (CAPA) to the authorities, and the regulator has stated that this facility will receive EU_GMP certification by November 2018 (subject to approval of CAPA). Currently, no supply to the EU happens from this facility; so, the revenue impact will be zero.
• Key oncology facility from US business perspective: Notably, DRRD’s Duvvada facility is under warning letter from US FDA. The facility was re-inspected by US FDA in March 2017 and was issued 13 observations. DRRD generates >15% of its US sales from the Oncology segment, but the Duvvada facility accounts for just 6-7% of current US sales. This is because large part of the supply comes from third-party sources including Cipla and Gland Pharma. Currently, 15-18 ANDAs are pending from this facility, of which 4-5 are pending in FY18-19. Gleevec is the key launch due from this facility. Given that the partner site (Hetero) has also come under regulatory scanner, if the Duvvada facility does not come back on track, Gleevec approval may get pushed further.
  
• Srikakulam clearance necessary for Copaxone approval: DRRD’s Srikakulam facility was re-inspected in March 2017 and was issued two 483 observations. The observations were routine in nature and the warning letter should get lifted soon. Copaxone API has been filed from this facility (formulation filed from Gland Pharma) and resolution of the warning letter will open roads for approval of this product (US FDA approval will still be required; Natco has still not got the approval). Copaxone 20mg & 40mg sales in US are ~USD3.5b (~84% from 40mg and rest from 20mg). Six generics players have filed for this product (Synthon, DRRD, Mylan, Amneal, Biocon/Apotex, and Sandoz). Sandoz has already launched the 20mg generic. We believe DRRD could be the 3rd or 4th player to launch generic Copaxone 20mg/40mg by 2HFY18.