On Tuesday, Lupin Ltd clarified to BSE Ltd at 1.50pm that the US Food and Drug Administration (USFDA) had indeed issued three observations after a recent inspection.
Lupin said the observations at its Madhya Pradesh facility were minor and that it expected to get a ‘voluntary action indicated’ audit observation. Even after this clarification, the share ended with a 6.3% decline, although that’s a lot better than the 13.5% decline at the day’s low point.
Mention a pharma company’s name, USFDA and observations in the same breath and investors don’t wait to ask questions. If Lupin’s word had been taken at face value, then its share should have ended flat.
Take the case of Natco Pharma Ltd.
On Monday, Natco Pharma’s shares fell 12.6% after an inspection at two of its facilities led to observations from the USFDA. It clarified these were minor and it expected no adverse impact. On Tuesday, its share fell by 4.1%.
A continuing series of USFDA inspections that are uncovering irregularities in compliance has unnerved investors. Comforting noises from companies are not sufficient to calm these nerves, chiefly due to their past experience.
In some companies, USFDA actions have led to a ban on exports to the US, implementing costly remediation plans that affect normal operations and the stopping of new drug approvals from the affected facilities. Even in these cases, companies had said that they were addressing problems and everything will be alright, eventually.
The compliance-related issues have combined with other adverse factors, such as slow rate of generic approvals and declining realizations, contributing to slower US market growth for some companies. In turn, this has become a thorn in the side for valuations. Domestic and emerging markets have not been able to compensate.
The BSE Healthcare Index has fallen 13% in three months, nearly thrice the 4.5% decline seen in the broader markets. Maybe, some of this is also due to a shift away from the defensives. But a large share can be attributed to the continuing trip-ups on the compliance front. Continuing news flow on this front could have the potential to keep valuations down till these problems go away or some other strong factors emerge to offset them.