Wednesday, April 28, 2010


Dr Reddy’s initiates Class III recall of 9 batches of risperidone
Dr Reddy’s fell 3% today following news that co. has initiated a Class III recall (a situation in which use of or exposure to a violative product is not likely to cause adverse health consequences) for 9 batches of Risperidone tablets. The reason for the recall is out of specification results at the 18 month time point. Out of the 9 batches being recalled 7 of them were to expire in April 2010.

Limited negative fallout seen from this recall
Co. indicated that the drug accounts for less than 0.1% of U.S. revenues and therefore has negligible financial impact. These batches were manufactured before the previous recalls in early Oct’09, following which the co. took strong corrective action at its facility. The plant was re-inspected by the FDA in Nov’09 and received only one minor observation. We therefore do not expect any further negative fallout from this recall.

Maintain bullish stance
We continue to see significant near term drivers for the stock with ramp up of Prilosec OTC and launch of Allegra D-12 and D-24 in Q1FY11. Fondaparinux generic approval remains another trigger, although not a part of our estimates. We also expect the API business to benefit from the strong wave of patent expiries over 2011-2012 in US.

Valuation: Maintain Buy, PT Rs 1,500
We continue to derive our price target using DCF-based methodology, explicitly forecasting long-term valuation drivers using UBS’s VCAM tool (WACC of 11%).

To read the full report: DR. REDDY