Viswanath Pilla Moneycontrol News
Post market hours on December 7 last year, Divis Laboratories told stock exchanges it had received five observations from the US drug regulator for its Unit-II facility in Visakhapatnam. It did not explain the nature of these observations.
The stock did not react much the next day, an oddity considering how investors nowadays overreact to even minor events.
The initial muted reaction was either owing to the lack of details or because investors drew comfort from the fact that Divis remained one of the last Indian pharma companies to have avoided the US Food and Drug Administration’s wrath.
But everything changed on December 23. After the company made public the details of the observations, the stock lost a quarter of its value.
Devil in the details
The observations included the failure to exercise proper control over computerised systems used for analytical testing of drugs, poor maintenance of facilities and equipment, not conducting a proper investigation into complaints on deviations in product batches, among others.
What might have particularly irked the regulator was that inspectors found evidence of falsification and destruction of documents. This indicated serious breaches of data integrity, which the agency considers a serious offence.
Moneycontrol independently verified the observations listed in the US FDA’s 18-page letter addressed to Kiran S Divi, Director and President – Operations at Divis.
The final blow came on Tuesday, when the regulator banned Divis’ Unit-II facility. The stock tanked 20 percent, despite the relief of 10 products being exempted from the import alert including some top-selling active ingredients.
The US FDA sometimes exempts products if it sees shortages significantly impacting patients and drug prices.
As per the import alert, the FDA inspection revealed that the firm was not operating in conformity with current good manufacturing practices (GMPs).
The alert will remain in effect until the violations are considered resolved, either through re-inspection or submission of appropriate documentation.
Possible impact
"Divis along with third party consultants, is currently working to address the concerns of the US FDA and is making all efforts to fully meet the compliance requirements,” the company said in a statement on Tuesday without specifying the impact the import alert will have on its sales in the US.
Company executives couldn’t be reached over phone on Wednesday.
Divis’ Unit-II plant in Visakhapatnam is located at Chippada village, about 35 km north of the port city and accounts for 23 percent of overall sales .
Analysts anticipate not just revenue loss on account of the import alert, but also see risks of order cancellations, customer attrition and a slew of rigorous inspections by other regulators, which could structurally affect the business.
"With 40-50 percent of the drugs manufactured here covered by the import alert, we cut FY18/FY19 earnings estimates by 36-40 percent to build in revenue losses, remediation costs and order cancellations," said Religare Securities in its research note.
"Fresh capacity addition is likely to be delayed given the ongoing farmer agitation at Vizag and Kakinada, and with Unit-I operating at 85 percent-plus, Divi could find it difficult to shift key products," Religare said.
Amey Chalke of HDFC Securities concurred.
"Divis is a preferred partner for most top Pharma MNCs, and presently enjoys an advantage over other less established players," he said. "However, the import alert has now created an uncertainty regarding the continued success of the custom synthesis business."
The top 5 customers constitute 38 percent of the company’s revenues.
Analysts were also surprised by the swiftness of US FDA action. Typically US FDA alerts the company through a warning letter and in the same letter it gives directions and time-frame for corrective action. In Divis’ case, there seems to have been no such formality.
"The problem with Divis is that in the absence of a warning letter, the company may not be able to undertake any remediation," said GG Gurudatta, Director and CEO of Bengaluru-headquartered Estima Pharma.
Gurudatta expects the resolution of Divis plant to take around three-and-half years and a review the list of products exempt if the regulator doesn’t see any shortages.
Forgettable year
Divis started off 2017 on a high note. The company moved its corporate office to new premises at Hyderabad’s IT hub Hitec City. It ended FY16 with a net profit at Rs 1107.69 crore and sales of Rs 3815.7 crore, maintaining a healthy EBITDA margin of 37 percent. Around three-fourths of the company’s sales came from exports to US and Europe. The company is also setting up a large manufacturing facility near Kakinada in Andhra Pradesh at an investment of Rs 500 crore.
Murali K. Divi, 65, chairman and managing director of the company, announced to his shareholders at the company’s annual general meeting that the new plant “will help de-risk its operations and achieve visible growth opportunities.”
Just when everything seemed to going in the company’s favour – Divis was struck with an agitation from farmers opposing its upcoming plant on grounds of alleged pollution and forcible acquisition of land.
The local agitation and delays in getting approvals has pushed deadlines by several quarters. To make matters worse, the company that earlier maintained a clean regulatory track record failed spectacularly in the December US FDA audit.
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