Reduce Dr Reddy's for the Target 1,300 by Emkay Global Financial Services Ltd
Dr Reddy's has disclosed that it has halted commercial supplies of Semaglutide with the recently scaled-up batch being found to be out of specification due to an issue associated with an impurity. The company’s revised guidance of 6-7mn pens in 2HFY27 (assuming commercial supplies resume by Nov-26) implies FY27 volumes closer to 8mn (vs guidance of ~10-12mn pens earlier). Three key risks have clearly emerged post the development: i) Resumption and scale-up in volumes don’t materialize by 2HFY27. ii) The market landscape meaningfully deteriorates by the time Dr Reddy’s enters. iii) The uncertainty around how partner-driven volumes will play out. In this backdrop, our and the street’s prior FY27 margin assumptions (closer to 20%) now seem out of reach, and we cut our FY27 earnings estimates by ~7%. We note that the stock has remained flat over the last 1 year even as the consensus FY27E earnings have been downgraded by ~10% (even prior to this event) during this period. This has largely been a function of the fact that FY28/FY29 consensus estimates have not moved much during this period. However, this phenomenon might not play out again over the next 12 months in the event of a negative development linked to Abatacept—the key driver of FY28/FY29E earnings—also emerging going forward (refer to our note published last week). We retain REDUCE.
Impurity issue halts Semaglutide supply; FY27 guidance cut to ~8mn pens
Dr Reddy’s has clarified that the issue potentially relates to peptide synthesis defects (arising from addition, deletion, or substitution of amino acids), leading to an impurity in the formulation being identified during the validation stage. The company has not yet identified the specific cause of the degradation and the impurity found, with root-cause analysis expected to take up to a couple of weeks. No batches from the API scale-up have been shipped to the market, and there is no impact on existing regulatory filings or Semaglutide oral tablets (utilizes a different API). The company expects to complete revalidation, testing, and sterility checks by end-Sep-26, with commercial APIs potentially getting shipped to OneSource in Oct-26 and market supplies resuming in Nov-2
KTAs from the investor call
1) The company will qualify an alternative supplier for Semaglutide API, but it will require a separate pre-approval supplement filing and take ~1 year.
2) The company will write down inventory for the affected batches, as stock currently with OneSource is Dr Reddy’s’ own inventory.
3) The management does not anticipate penalties under current supply arrangements, though some commercial terms may need renegotiation with partners. The company will also supply to other players in the Canada market.
4) The company’s in-house fill-finish capacity plans remain on track, but will be delayed by a few months versus original timelines.
5) No batch recalls expected; one batch recall in the domestic market not related to the current issue
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