Home >Markets >Mark To Market >Increasing US FDA scrutiny sends Indian pharma stocks into a tizzy

Some Indian pharma stocks were seen headed into ICU again after news of the US food and drug administration’s (FDA’s) inspections. On Monday, shares of Glenmark Pharmaceuticals Ltd and Aurobindo Pharma Ltd nosedived on receiving warning letters after their plants were inspected by the US public health protection agency. While the Glenmark stock declined by 9.5%, Aurobindo tumbled a whopping 19% on Monday.

Of late, the FDA’s inspections on Indian plants exporting drugs to the US have increased (see chart). This has continued to pose a huge threat to Indian pharma stocks.

The scrutiny on Indian firms has been increasing compared to the rest of the world. Indian pharma firms accounted for nearly one-third of the total foreign inspections by FDA between October 2018 and June 2019, shows data collated by Jefferies India Pvt. Ltd. In the past four years, India’s share in the total number of foreign inspections by FDA was about one-fifth of the total.

“The US FDA has also been increasingly issuing warning letters to Indian companies. FDA recently announced that it is investigating carcinogenic impurities in Ranitidine products... Given the already increased media focus on generic quality and election cycle, this can bring quality concerns again to the forefront for generic players. We consequently expect FDA to increase its scrutiny for the whole supply chain," said analysts at Jefferies India in a recent report.

To be sure, analysts say that quality standards have improved in the past few years. Needless to say, the increased scrutiny will result in higher costs in quality enhancement, while at the same time increase the risk of adverse observations.

The FDA observations are also coming a lot faster after plants are inspected, which tends to exacerbate the impact on stock prices. “The gap between inspection and warning letter issuance has also decreased from more than 10 months in FY16 to less than seven in FY18. This indicates a higher degree of severity by FDA on quality norms," said ICICI Securities Ltd in a recent note to clients.

Nevertheless, Aurobindo Pharma fell more sharply as analysts were taken aback by the news. Glenmark Pharmaceuticals, though, received a warning letter following an Official Action Indicated issued earlier by FDA for its Baddi plant. Revenue from the Baddi plant accounts for about 7% of US sales, and the Glenmark management clarified that these will not be impacted. However, analysts say warning letters could impact new drug launches in the US, affecting future sales.

However, a speedier resolution to the observations from FDA is required. These warnings could continue to be an overhang on the pharma stocks till the issues are resolved.

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