Pharmaceutical major Dr Reddy’s Laboratories has received a warning letter from the US Food and Drug Administration (FDA) over quality control issues at three of its manufacturing facilities.
This comes even after the company said it had been addressing the initial observations made under a form 483 by the FDA inspectors in relation to these facilities earlier this year. In fact, the American regulator had issued nine observations to the company after inspection.
Warning letters are issued for violations of regulatory significance and these could lead to enforcement action such as import alerts, if not promptly and adequately corrected in voluntary compliance with the US drug laws by the companies.
The FDA cited two of the company’s active pharmaceutical ingredient (API) facilities, one at Srikakulam in Andhra Pradesh and the other at Miryalaguda in Telangana, and an oncology formulation manufacturing facility at Duvvada near Visakhapatnam in Andhra Pradesh.
The company stock plunged 14.65 per cent and closed at Rs 3,629 on Friday, following the adverse news. While analysts were aware of concerns pertaining to the Srikakulam plant, the inclusion of Telangana and Visakhapatnam came as a surprise.
This was the first time the company, the country’s second largest generics drug maker, has been facing a regulatory scrutiny of this magnitude involving three of its facilities, after it had received an import alert on its Mexican chemical plant in July 2011.
Any similar action will have a much larger financial impact on the company as these API facilities alone account for 10-12 per cent of total sales according to the company’s earlier admission. Dr Reddy’s API business caters to leading innovator and generic companies across the US, Europe, Latin America, Japan, Korea and other emerging markets. Most of these products are consumed inhouse in the formulations manufactured by the company.
The API business segment makes up for about 15 per cent of the revenue. But the biggest revenue contribution comes from the US market which accounts for 44 per cent of the consolidated revenue.
Over the last eight quarters, the company has maintained a revenue rate of $250 million or over Rs 1,500 crore per quarter in US sales.
While the revenue contribution from the scrutinised plants is about 12 per cent, an import alert could impact the company’s bottomline by about three-four per cent, given the 25 per cent margin, say analysts.
Analysts also fear risk of delays to product approvals from Dr Reddy’s until it addresses the issue. Brokerages are likely to downgrade the earnings estimates for FY16 following this development. Already the company has been facing the heat because of ongoing compliance issue. In the Q2 earnings call, the company management had disclosed that FDA had withdrawn product approvals of two of its API customers.
“They (FDA) want us to tell the management strategy and action plan with respect to the corrective steps. The letter does not talk about any precipitative action,” Saumen Chakraborty, chief financial officer of Dr Reddy’s, said.
According to him, the company management has been giving periodic updates to the USFDA on the corrective steps ever since it had received the 483 observations on these facilities. “May be our remedial actions had addressed quite a few of these observations while on some others, they may still feel our actions are inadequate,” he added.
The company has also been making efforts to shift the products (site transfer) manufactured in the two facilities to other sites while working on the corrective actions in line with the USFDA observations, according to him. The oncology facility, which was also cited in the latest warning letter, was at the technology transfer stage and the manufacturing of injectables was yet to start from here.
“It may take 1-2 years to make the corrective steps as required by the USFDA at these facilities. The impact of the API facilities would depend on how quickly the company could fix the problem,” Sarabjit Kour Nangra of Angel Broking said. The oncology formulations facility, which was set up a year ago, will not have any significant impact on the revenues, according to her.
The latest regulatory action follows USFDA inspections of these facilities between November 2014 and February 2015. First the company had received 483 observations from the inspectors, notifying the company of certain objectionable conditions.
“We take quality and compliance matters seriously and stand by our commitment to fully comply with the CGMP quality standards across all of our facilities. We will respond with a comprehensive plan to address these observations within the stipulated time-frame of 15 days. We will continue to actively engage with the agency to resolve these issues and we have also embarked on an initiative to revamp our quality systems and processes, as an organization-wide priority,” said G V Prasad, co-chairman and chief executive officer of Dr Reddy’s said in a statement.