Dr Reddy's awaits USFDA inspection report for Srikakulam facility after a 'good' December quarter

It was a hectic beginning of the week for Dr Reddy's. The United States Food and Drug Administration (USFDA) was busy inspecting the company's active pharmaceutical ingredients (API) unit at Srikakulam, the last of the units facing the US regulator's warning letter. Meanwhile, Dr Reddy's stock touched a 52-week high on the Bombay Stock Exchange. The high came despite the company reporting a net loss in its third-quarter financial results on account of one-off impairment charge taken on a few products.

According to analysts, the company posted "a good set of numbers, especially from the point of margin performance" for the third quarter. As for the USFDA inspection, the current inspection gains importance given that it is last of the pending warning letters awaiting clearance.

USFDA had issued a warning letter to Dr Reddy's on November 5, 2015, over deviations with current Good Manufacturing Practices at its API manufacturing facilities in Srikakulam, Andhra Pradesh and Miryalaguda, Telangana, as well as over violations at its oncology formulation manufacturing facility at Duvvada, Visakhapatnam, Andhra Pradesh. Of these three manufacturing facilities, API manufacturing facility at Miryalaguda and oncology formulation manufacturing facility at Duvvada received Establishment Inspection Reports from the USFDA in June 2017 and February 2019, respectively. However, the API manufacturing facility at Srikakulam is still under audit.

At a press meet to announce the financial results of Dr Reddy's for December quarter, CFO Saumen Chakraborty said he could not say anything at the moment and would have to wait for the inspection to conclude to share the outcome. He, however, pointed out several positives that the company was able to achieve in the third quarter.

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On EBITDA margin, Chakraborty said, "We are closer to 25 per cent, something that we have been aspiring to get to." Despite the impairment, he said, "It has been a very healthy quarter with healthy gross margin and now we have moved to a net cash surplus of Rs 414 crore as on December 31, 2019, something that the company has not had over several quarters now."

On what the net cash surplus can be used for, Chakraborty said, "As a company, we believe we cannot take much financial risk but then having net cash surplus is also not good, in a sense. Inorganic growth is an integral part of our strategy and there are specific spaces where we will have more priority of achieving inorganic growth. So, some of the cash surplus could possibly be used to fund this."

GV Prasad, the co-chairman and managing director of Dr Reddy's, said: "The current quarter performance has been good across all our businesses and we achieved strong EBITDA margins. The profits were impacted due to trigger-based impairment charge taken on a few products including Nuvaring. We continue to focus on execution and have made significant progress on quality systems and operational efficiencies".

Chakraborty said, revenues from emerging markets showed year-on-year growth of 19 per cent, and those from India grew annually at 13 per cent. "Compare us with us two years ago, today, we have much more sales with lesser cost," says Erez Israeli, CEO of the company. Even dependence on the United States is steadily reducing, Business Today learnt from company officials. It constitutes around 35 per cent of total sales, as against around 50 per cent a few years ago. India's contribution to total sales increased to 18 per cent during this period from 13 per cent.

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