For DRL, 3245-3200 might be a good zone for buying
For a near term target of 3625-3850
Strong balance sheet & sustainable earning growth can propel the stock
Despite near term USFDA hangovers, which may be overdone.
CMP: 3360
Buy either in breakout above 3400-3500 or in dips around 3250-3200:
TGT: 3625-3850-4080 (1-3M)
TGT: 4340-4450 & 4950-5250 (12-36M)
TSL<3170
Note: Consecutive closing below 3170-3150 zone for any reason, DRL may further fall to 3125-3020 & 2950-2850-2745-2550 zone, where it may be again accumulated for better investment buying average.
We all know the reasons behind the DRL's epic fall for the last few weeks by over 25% from its mid Oct top of around 4390.
On 6-th Nov DRL officially disclosed that it had received a "warning letter" (Form-483) dtd 5-th Nov from USFDA for its three manufacturing plants in AP & TS, which supplies oncology and certain other generic drugs & API to US after three early inspections of the above manufacturing sites by the USFDA in Nov'14, Jan & Feb'15.
Further on 9-thNov, in a concall, the company acknowledged that USFDA has directed it to get a third party assessment (audit verification & evaluation of the corrective measures taken by DRL) of the above three manufacturing sites for issues raised in its earlier warning letter and also do that audit across the other manufacturing networks of DRL.
As par DRL management, the company has already instituted corrective actions and after the reassessment of the external 3-rd party, it will continue to implement the corrective measures.
DRL also indicated that it is in the process of shifting some of its products to other manufacturing plants in the wake of the above warning letter and also revamping its overall quality systems as par stringent USFDA guidelines.
USFDA issued the warning letter to DRL for inadequate quality controls in the above three MFG plants and DRL will not receive US approvals for drugs made at these plants, until the issue has been resolved. DRL will reply to the USFDA after the mandatory 15 days time frame.
In late Oct'15, there was report that two of the DRL's API customer had received the ANDA approval recession letters from USFDA citing classification of DRL's API facilities as potential OAI (Official Action Indicated) on the date of approval. The above ANDA were approved in Jan & Feb'15, after the USFDA inspection of the DRL's API facilities in AP & TS.
In late Oct'15, there was report that two of the DRL's API customer had received the ANDA approval recession letters from USFDA citing classification of DRL's API facilities as potential OAI (Official Action Indicated) on the date of approval. The above ANDA were approved in Jan & Feb'15, after the USFDA inspection of the DRL's API facilities in AP & TS.
As par reports, these three plants contribute around 10-12% of DRL's overall revenue and a full production halt may affect only 1-2% of the company's annual EPS.
Adding to the above woes. a US district court has issued a Temporary Restraining Order (TRO) on 9-th Nov with immediate effect to stop sell of its recently launched generic "Esomeprazole" (Original Nexium of Astra).
The US court order follows by Astra petition/complain about the "near similar" "Purple" color used by the DRL in its generic clone of the original products Nexium & Prilosec, which may confuse the patients community.
Although the US court order is temporary and final order will be issued after full trail, as par some analysts, this issue is not that big, given that it only involves tablets color issue as "Purple Pill" is a marketing brand of Astra. However, in the worst case scenario, the revenue involved is about $ 30-50 mln for this product and an overall EPS impact of Rs.1-2 !!
There were also reports of violent protests by some temporary workers on wage issues at its Srikakulam plant in AP.
Some investors in the US are also reportedly flied complaints and damage claims about the sudden & massive stock price fall and possible federal securities laws violations by DRL and its officials over the recent USFDA issues.
Some investors in the US are also reportedly flied complaints and damage claims about the sudden & massive stock price fall and possible federal securities laws violations by DRL and its officials over the recent USFDA issues.
Certainly it seems that DRL is going through lots of bad patches and currently may be "under Saturn" and the warning letter is expected to remain an overhang on the stock until the matter is resolved !!
But, going by the recent time & price action on the stock, the above sets of scary news may be already discounted by the market to a great extent as analysts are concerned about the near term effect on earnings because of product supply constraints to US and delay in new products approval from the affected plants despite strong R&D pipeline of DRL.
Apart from these, market is also concerned over intensified pricing pressure/competition in US drugs market as 2016 US election is coming and various political leaders are questioning about sky rocketing medicines prices amid so called "Obamacare". But that said, most of the US people are covered adequately under medical insurance and its the insurance companies which will ultimately bear the cost of medicines except few basic OTC products. So, "exorbitant price" of medicines may not be a great issue there.
Analysts at JF are also concerned over the fact that post Q1FY16 result, DRL has stated that they have completed the remedial work from their side and are awaiting for a USFDA re-inspection. The latest warning letter, however shows that USFDA considers DRL's response insufficient and the company needs to do much more to make the facilities compliant. The warning letter and subsequent 3-rd party audit instruction at the three plants and to other MFG facilities across the DRL network indicates a potential risk that the compliance issues are systemic to the company. Thus the stock tanked so much within a few days. For the time being, JF has a hold rating on the stock and TP is around 3600 !!
As par the USFDA norm, post a facillity inspection, FDA issued a Form-483, if it found deficiencies there. The company then has to respond and implement corrective measures to address the issues involved. If FDA is not satisfied with the response and the corrective measures, it issues a warning letter (sometimes after OAI), which does not restrict supplies from the plant, but it stops any further new product approvals/ANDA from that particular plant. Supplies will only be stopped when there is an import alert or ban by USFDA on any facility.
As par the management of DRL also, its just a "warning letter" and it does not commit any kind of action as of now. They have to respond to the USFDA with a comprehensive plan and strategy within the stipulated 15 days to address all the concerns in the Form-483. As par DRL, these 483 observations are not new and in the public domain for a very long period and the issues are primarily of various kinds of common issues like lab analysis performed in DRL facilities and the integrity of maintaining those records and any kind of password sharing etc. Although there is no import ban or quality concerns expressed by the USFDA, the company is considering shifting of the manufacturing process to some other facilities as a pre-cautionary measure and will find out appropriate strategies to resolve these issues. Along with this, their primary focus now is to take all its customers in confidence and clarify about this long pending USFDA issues and the latest warning letter.
But all is not bad for DRL. Its recently launched a Nimesulide combination pain killer spray (Nise-D) in its OTC portfolio and as par the company, the estimated market is significant at around Rs.1700 cr and this spray market is growing 20 times faster than traditional creams & gels, thus indicating a change of trend among the consumer preferences.
DRL also recently inked distribution pact with Biocodex to promote & market the latter's flagship OTC products in Romania. With this collaboration, DRL expects to develop the access of Romanian patients for its Rx portfolio along with Bicodex's well known OTC products.
Q2FY16 result of DRL was also above street estimates with record consolidated Q2PAT around Rs.722 cr against consensus of around Rs.637 cr, up by almost 26% YOY & 16% QOQ.
Q2FYA6 EPS was at 42.20 against expectations of 38.25 (YOY-33.60 & QOQ-36.58).
The company attributed the good show in Q2 for robust sales growth across US, EU and India on the back of new products launched in the last twelve months. In US & EU, Q2 revenue was grown by almost 32 % & 65% YOY !!
Global generic business, which contributes around 80% of DRL's overall revenue, was grown by 15% in Q2FY16.
Domestic sales was somewhat tepid, grown by around 14% due to transporter strike and fragile rural economy/erratic monsoon this year but helped by full integration of Belgian firm UCB's product acquisitions.
Russian sales were down by around 29% due to Rouble depreciation (currency headwinds) and macroeconomic uncertainties there.
R&D expenses rose by 9% in Q2, as the company invested & focused more on biosimilars and complex generic drugs, but raw material cost declined by almost 18% in this period.
Gross operating margins (revenue minus cost of production) was grown by nearly 2.85% to around 61.3% in Q2FY16.
The company stated that due to litigation ( say, USFDA issues), they will launch fewer generic new products in the H2FY16 and it will be spilled over FY17 and is optimistic about sales growth for Nexium generic in US, targeting a 15% market share there.
But this DRL Nexium is in deep trouble in US now and the scrip spooked again !!
The company guided in Q2, that its aiming more than $50 mln overall annual sales and Columbia & Brazil will be the next key EM markets, where it plans to expand inorganically.
After the result, various analysts cut down the projected FY16-17 EPS by around 5% due to near term challenges in US business and fewer ANDA approvals amid potential competition.
Looking ahead, although US sales may be affected due to FDA concern there, Russian & other EM sales might revive amid stabilization there. Although, US is a big market, DRL is also trying to spread its business across the globe, thus reducing the dependency on US sales amid stringent USFDA and focusing more on margins.
DRL is also giving great attention to enhance quality management and infrastructure to meet the evolving global standard requirements and pending CGMP (Indian FDA/Drug Control) related matters at some of their facilitates.
On a cumulative basis, DRL has 76 ANDAs (Abbreviated New Drug Applications) with USFDA and 755 DMFs (Drug Master Files) globally, which are pending as on Q2FY16.
Thus once. USFDA issues are resolved, we may see incremental revenue growth for DRL. Also company's professional FX management may hep it in future for any possible cross currency volatility.
The ongoing USFDA issues now are very common with all major Indian Pharma companies and its not unusual. Every alternate day or in regular interval, we hear some USFDA issues with any of the Indian Pharma majors, supplying generics & APIS to lucrative US market. In one of the erstwhile Ranbaxy plant, USFDA found a trace of hair in a tablet there and some company was even running a processing facility near its office urinal !! But, certainly things are now changed with increasing USFDA alert. Now, even Indian FDA and other Govt authorities are also taking great attention to resolve this "USFDA ghost" issues as it is tarnishing India's overall image in the US & other global pharma markets, which in turn may also affect the "Made In India" theme.
Medicines are "all season" products and its an obligation and not an option. Apart from US market, India's own consumption may see incremental growth due to growing health consciousness, white collar jobs and over all improvement in standard of life along with growth in disposable income.
Another thing is that all major Indian pharma companies are good political fund donors and employers and with the forthcoming 2016 US election, we may not be surprised quite a lot, if we hear comparatively less USFDA issues in the days ahead.
Thus, it may be presumed that USFDA issues in India are peaking (as NPA in our banking system !!) and the worst is almost over for Indian Pharma space with Sun Pharma likely got a similar "Love Letter" from USFDA for its infamous Halol Plant (ex-Ranbaxy) & the stock is already tanked.
Going ahead, with favorable USDINR rate and relatively stable INR, pharma companies can be a good defensive bet against market volatility and a company like DRL, having strong balance sheet, good management and excellent debt profile with visible brands & superb distribution networks, may be an ideal stock.
DRL may be another example of "buying a good business in temporary distress or in an unusual conditions".
As par BG metrics & current market parameters:
(on the basis of consolidated TTM & FWD EPS)
Present median valuation may be around: 4050 (FY:15/TTM)
Projected fair valuations might be around: 4250-4525-4850 (FY:16-18/FWD)
| SCRIP | EPS(TTM) | BV(Act) | P/E(AVG) | Low | High | Median | 200-DEMA | 10-DEMA |
| DRREDDY | 142.74 | 577.6 | 30 | 4008.18 | 4056.48 | 4032.33 | 3751.7 | 3842.65 |
| DRREDDY | 156.8 | 672.95 | 30 | 4200.95 | 4251.57 | 4226.26 | 3751.7 | 3842.65 |
| DRREDDY | 178.75 | 785.95 | 30 | 4485.36 | 4539.41 | 4512.39 | 3751.7 | 3842.65 |
| DRREDDY | 205.25 | 915.45 | 30 | 4806.36 | 4864.27 | 4835.31 | 3751.7 | 3842.65 |
Analytical Charts:
No comments:
Post a Comment