Hyderabad: Rattled investors punished the stock of Dr Reddy’s Laboratories Ltd on Friday after India’s second largest drug maker by sales received a warning from the US Food and Drug Administration (FDA) on possible violations of manufacturing standards at three pharmaceutical plants.

Shares of the Hyderabad-based company dropped 14.65%—the most in 11 years—to 3,629.55 on BSE at the close of trading on a day the benchmark Sensex fell 0.15% to 26,265.24 points.

The FDA warning dated Thursday followed a quarter in which Dr Reddy’s posted a record profit of 722 crore on the back of strong demand in North America, which contributes about 60% of total generic drug sales for the company.

The warning was over its active pharmaceutical ingredient (API) manufacturing plants at Srikakulam in Andhra Pradesh and Miryalaguda in Telangana, and an oncology formulations facility in Visakhapatnam (Andhra Pradesh).

The warning followed inspection of these sites by FDA in November 2014, January 2015 and February 2015, respectively, the company said in a statement to stock exchanges.

FDA issues a warning letter if it finds violations of good manufacturing practices by manufacturers. The US drug regulator had during the inspections pointed to inadequate quality control procedures and data recording.

“We have responded to the observations made by USFDA, but it’s evident from the warning letter that the response wasn’t adequate," said a spokesperson for Dr Reddy’s.

The warning means Dr Reddy’s would not receive approvals for new drugs made at these plants until it fixes the problems—a blow for the company that derives half its sales from the US.

“We take quality and compliance matters seriously and stand by our commitment to fully comply with the current good manufacturing practices quality standards across all our facilities," said G.V. Prasad, co-chairman and chief executive officer of Dr Reddy’s.

“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," Prasad said, adding: “We will respond with a comprehensive plan to address these observations within the stipulated time frame of 15 days."

Dr Reddy’s ended the last fiscal year with revenue of 14,819 crore, making it the second largest Indian pharmaceutical company by sales with 22 manufacturing facilities across four countries that include India, the US, the UK and Mexico. The drug maker has 17 manufacturing plants in India.

The company said it’s assessing the impact of the warning letter on its financials.

The Srikakulam API plant alone contributes about 10-12% of total sales, said Dr Reddy’s.

The regulatory problems at the Srikakulam plant have already delayed the company’s launch of its much anticipated heartburn drug Nexium by around three quarters.

Generic Nexium was approved by FDA in September only when Dr Reddy’s shifted supply of the drug’s APIs to another plant.

“We have a de-risking plan in place; we have been transferring some of the APIs to other manufacturing sites, and we got a couple of approvals in that process," said the company spokesperson mentioned above.

Analysts warned that the move by FDA would hit US sales for at least the next two years, as the launch of key products may be delayed.

“The near-term performance of the company will be impacted," said Sarabjit Kour Nangra, vice-president (research, pharma) at Mumbai-based Angel Broking Pvt. Ltd.

If the company fails to adequately address the problems flagged by FDA, it may trigger an import alert or ban on the facilities.

To be sure, it’s not the first time that Dr Reddy’s has faced FDA scrutiny. In July 2011, FDA issued an import alert against its Mexican manufacturing unit, saying it had violated manufacturing standards, and stopped shipments to the US. It revoked the alert a year later after the company took corrective action.

The warning letter is the latest in a string of FDA actions against Indian pharmaceutical firms.

Ranbaxy Laboratories Ltd (acquired by Sun Pharmaceutical Industries Ltd), Sun Pharma, Cadila Pharmaceuticals Ltd, Ipca Laboratories Ltd, Wockhardt Ltd and Aurobindo Pharma Ltd have all faced FDA action in recent years.

India has around 300 FDA-compliant manufacturing plants, the largest outside the US.

The concern on FDA’s part is natural, given that India has become a big part of the global drug supply chain, said David Keeling, a director at consulting firm McKinsey and Co.

“And so to some extent it’s entirely to be expected that the regulators will visit more often and will be concerned about quality," said Keeling, who leads McKinsey’s global quality, compliance and remediation practice. “I do not see a disparity in the way they treat Indian companies versus anywhere else."

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