Despite the latest US Food and Drug Administration’s ( US FDA’s) stricture on one of its plants, Lupin Ltd’s stock didn’t react negatively. The stock was up marginally at ₹764.20 on Thursday. The US drug regulator classified the inspection of the company’s Mandideep (Unit 1) plantin Madhya Pradesh as “official action indicated". This implies a possible freeze on approvals of new products from the plant. Given that no new filings from this plant are pending, the observation will not have a noticeable impact in the immediate future.
Even then, there are amber signs flashing. A Jefferies India Pvt. Ltd’s note sees two potential impacts. “While management does not expect any supply disruption, we believe this would depend on requirements from the US FDA, and there could be some disruptions; two, the larger impact would be remediation cost as the company hires consultants," said the note.
As the Lupin stock has lost a fifth of its value in the last six months, the impact of the news has been minimal. Further, investors might as well be positioning themselves for a growth rebound. The generic drugs business in the US is showing signs of stabilization. Several limited-competition drugs are also being lined up. In FY20, the company is projected to post double-digit revenue growth.
Revenues in the first nine months of FY19 are up 4%, but they are projected to increase 13-15% in FY20, show estimates by Jefferies India and Kotak Institutional Equities. This is against a backdrop of a 9% drop in sales in FY18.
However, for investors eyeing a sustained recovery, the latest US FDA restriction is a dampener. In totality, three manufacturing units are under the US drug regulator’s lens. Experience shows that remediation is a long-drawn process running into years in some cases. This restricts manufacturing and drug-filing capabilities, crucial to generic drug firms such as Lupin.
“Given that Lupin is grappling with two existing warning letters for Indore and Goa, this development is sentimentally negative," said analysts at Kotak.
Worse, the stricture comes even as the company is beefing up its facilities. This implies quality standards still need further upgrades, points out Jefferies India. Hence, investors will do well to keep track of the remedial measures and the progress.