Divi’s Labs says US FDA import alert on Vizag unit to hit revenue by less than 5%
Mumbai: Divi’s Laboratories Ltd Monday said a recent US Food and Drug Administration (FDA) import alert at its Andhra Pradesh factory will hurt its revenue by less than 5%, since the ban has excluded 10 products made there.
On 21 March, the US FDA issued the alert on unit-II of the company’s Visakhapatnam unit citing violation of good manufacturing practices, but exempted 10 products, including drugs to treat epilepsy, cancer and HIV. The import alert means products manufactured in the unit will not be allowed to be marketed in the US.
These products were exempted to prevent shortages and some customers may approach the US FDA to exempt more drugs, Murali Divi, chairman and managing director of the Hyderabad-based company said in a conference call with analysts.
Divi’s shares fell 20% on 21 March on news of the import alert. On Monday, the shares closed up 1.74% at Rs633.95 on the BSE, while the benchmark Sensex closed 0.63% lower at 29,237.15 points.
Resolving import alert-related issues is generally a long-drawn process for companies and hence, this statement from Divi’s comes as a breather,
However, investors will remain cautious for at least one or two quarters as there could be incremental negative news from the regulator’s side or customer’s side, a Mumbai-based research analyst said, asking not to be identified, citing company policy.
The Visakhapatnam unit contributes about 22% to the active pharmaceutical ingredients (APIs) and intermediates manufacturer’s total sales. North America accounts for 32% of the revenue. In the quarter ended December, the company’s sales were Rs973.44 crore, as against Rs858.65 crore a year ago.
“I expect 5-6% decline in revenue in FY18 (financial year 2017-18) but the fall in earnings could be nearly 20% given the rise in costs due to remedial measures at the plant and also because there could be delay in sales as batches will be verified by consultants. However, the stock has corrected significantly and earnings risks have been factored in, so I believe the downside (in the stock) is protected,” said Surya Patra, an analyst at PhillipCapital India.
Excluding the impact of the import alert on US sales, the company expects its revenue to grow around 10% in 2017-18, Divi said on the conference call.
He said the company had sent responses to US FDA regarding remedial measures at the unit and was awaiting the regulator’s direction for the next course of action. Divi’s has also hired third-party consultants as well as US-based subject matter experts to resolve compliance issues at the manufacturing plant.
The US drug regulator inspected Visakhapatnam unit between 29 November and 6 December, 2016 and issued a Form 483 with five observations relating to deviations from norms. Consequently, an import alert was levied on the plant, but the US FDA has not yet issued a warning letter to the company.
“There will be more clarity on what the exact issues are and what the regulator expects from the company once the warning letter is issued and displayed on the US FDA’s website,” the Mumbai-based analyst said.
The five observations in the Form 483 were: lack of proper controls over computer systems, improper maintenance of facility and equipment, R&D division allowing activities inconsistent with manufacturing norms, failure to investigate batches of products containing impurities and improper maintenance or falsification of records.
The management indicated on the call that unit-1 at Nalgonda in Telangana, which was last inspected in 2014, might go through an US FDA audit during this year and the company is “fairly prepared” for it. The Nalgonda unit contributes 10% to sales.
The company is planning to invest Rs175 crore in capacity expansion at the Telangana unit and Rs25 crore in Visakhapatnam unit’s expansion in FY18, Divi said.