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DRL stock over-reacted; like Sun, Torrent Pharma: IDFC Sec

Nitin Agrawal, Pharma & Real Estate Analyst at IDFC Securities says that Dr Reddy ’s stock over-reacted today after news of Ludhwin Law announced that it is probing the pharmaceutical giant concerning possible violation of federal security laws.

Speaking to CNBC-TV18, Agarwal says that Sun Pharma and Dr Reddy’s still remains his top picks in large cap pharmaceutical space. Both the stocks have
become attractive post their recent correction, he adds.

In the midcap, he prefer names like Torrent Pharma , Natco Pharma and Strides Arcolab  on back of strong visible and multiple drivers.
Below is the transcript of Nitin Agarwal’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.

Ekta: I am sure that there must have been a lot of queries today which you might have fielded. Can you tell us how you have read the news with regards to Dr Reddys today?

A: On Dr Reddys, the market clearly overreacted to the piece of news especially around the law suit which was there because till the time, the law suit, the class action suit as the lawyer calls it, gets accepted by the courts. I do not think it has any merit or one needs to worried about that. So, it is probably more of a knee-jerk reaction which I guess the stock seems to have stabilised from there on. We are not worried with that.

Anuj: What is your call on Dr Reddys because it has already corrected quite a bit. Do you think it is offering good risk reward? Would you be a buyer of Dr Reddys at current levels?

A: Yes, I completely agree with you. At the levels where it is, the risk reward is no getting, it is reasonably favourable, in favour of Dr Reddys now. The only risk which really remains right now is if the issue potentially escalates further, if Dr Reddys is not able to do a good job of satisfying the Food and Drug Administration’s (FDA) concerns in the warning letter, which in our view, the probability of that happening is pretty low.

So, all put together, given assuming if the import alert does not materialise it is very favourable risk reward situation at these levels because as things are, nothing much changes for time being. FDA has given Dr Reddys time, a clear road map to comply with the norms which they expect. And we expect Dr Reddys will successfully achieve that.

Ekta: Why is the probability low of an import alert according to you?

A: Our sense is there are two things. One is FDA has viewed Dr Reddys responses and if they were serious enough, FDA would have probably moved ahead with an import alert. They have given Dr Reddys a chance, they have given a roadmap in terms of things they need to do to comply with the norms, as far as the FDA norms. And our belief is that given Dr Reddys’ capabilities, they will be able to do a good job of satisfying or meeting FDA’s requirements and they will not falter in that.

Ekta: Just coming back with regards to the news particularly with regards to these law suits that Dr Reddys has seen since post the warning letter update that came in on November 6. It seems as though there are a series of law suits for investigations which have come in by multiple law firms in the US. Is that a normal practice that we have seen with other companies as well which might have seen US FDA issues and how serious would it be in the entire context of multiple low suits and not just one?

A: My own sense is that till some of these law suits actually get to the court level, that the court accepts these petitions is when we need to worry about the implications of these things happening.

Right now they are only in a statement of intent, if you will, from the various lawyers. Till the time the court actually considers serious enough to accept one of these petitions, there is honestly nothing much to read into it right now.

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