Due to exempted products, import alert from FDA to hit only 5% of Divi's sales: CFO

The import alert issued by the US Food and Drug Authority against the Visakhapatnam unit of Divi’s Labs last week is expected to impact 5 percent of the company's total sales.

The company addressed analysts in a conference call on Monday and explained that the US FDA has exempted several products due to a shortage of drugs in the US. This would curb the impact of the import alert.

The company has so far been guiding revenue growth of 10 percent for FY18 and FY19. Babu explained that with the import alert the company needs to assess the impact of 5 percent revenue impact.

During the call with analysts, Kishore Babu, Chief Financial Officer of the company, said: “Unit II of Divi’s contributes 60-65 percent of revenues and of this 32 percent comes from North America. Exports from Unit II could be 22-23 percent of total sales of Divi’s but due to exempted products, the actual impact will be only 5 percent of sales.”

The company conveyed that exports to the US constitute 22-23 percent exposure from Unit II, which is facing an import alert. However, less than 5 percent would be impacted due to the import alert.

The US FDA has given the company a methodology to export batches from the facility. Babu explained that the company would follow procedures and get the inspection done batch by batch. The company did not, however, disclose the extra cost incurred for the additional inspection (to be carried out) batch-by-batch as mandated by the FDA.

The company will work with consultants and modalities will be put into practice soon.  The company conveyed that US FDA has asked for a batch-by-batch verification of products by a third-party before exports. The company will put this in place soon.

The cause of concern stems from the fact that the US FDA carried out a surprise inspection at Divi’s Unit II facility and then issued an import alert. The company could not clarify if this was due to a whistle blower initiative or a regular surprise inspection.

Given that there are data integrity issues raised in the current observations made by the US FDA, there could be a similar inspection of Unit I too of Divi’s. In response, the company’s management conveyed that the company had prepared for an inspection of Unit I, too. Unit I accounts for 35 percent of the total turnover and 32 percent of this unit is to US exports. Overall, Unit I accounts for 10 percent of total sales.

The company also conveyed that customers of Divi’s were seeking an exemption of more products from Unit II. Babu said: “We and our customers will be approaching FDA for exemption of more products. These products are not new products. The import alert will not impact large products. The revenue impact will be negligible based on number of exemptions given which will be less than 5 percent."

The management of Divi’s Labs has largely been caught off guard by the import alert as it “came as a surprise and are ascertaining reasons. We cannot attribute one reason and we need more clarity once the review has happened by FDA.” Customers are familiar with FDA procedures and they are satisfied with remediation. The list of exemptions are based on FDA analysis on drug shortage.

Divi’s Labs gave US FDA an update in January and the second update will be given this week. The company will await evaluation from US FDA. The company is currently evaluating causes that would have led to an import alert.

The exposure of Unit II accounts for 22 percent but impact on sales is 5 percent. The reason for this is that Divi’s supplies ingredients to other manufacturers, which formulate and sell to the US market. This is also a reason for lower loss of business.

The company does not expect too much impact on its European exports as regulations are different and there are no issues with European regulations. The company said that they have not heard from European customers seeking risk mitigation.

The company is functioning at 87 percent capacity and it has spent Rs 500 crore in the current fiscal to expand capacity of Unit I and Unit II, as the new unit at Kakinada is getting delayed.

When asked if the company intended to carry out a buyback as the share price had corrected considerably, the company said while it was sitting on cash pile of Rs 1700 crore, its prime goal was to comply with US FDA observations. “We are concerned about value erosion but at this point remediation is most important.”