Divi’s Laboratories Slumps To Near 3-Year Low On U.S. Import Alert For Visakhapatnam Plant
Import alert for key plant supplying to U.S. drags Divi’s Laboratories shares lower.
Shares of Divi’s Laboratories Ltd. slumped as much as 20 percent to Rs 632 in early trade, its lowest level since June 2014, after the U.S. Food And Drug Administration (FDA) issued an import alert on the products manufactured at the company's Unit-II at Visakhapatnam.
The order issued on March 20 follows an earlier inspection by the U.S. FDA from November 29 to December 6, 2016, wherein the company was issued five observations. These observations were of serious nature and highlighted the concerns of falsification of records/documents, improper control over computer system for analytical testing and failure to guide quality and production activities.
The import alert signifies that the company cannot manufacture or market its drugs in the U.S. market from that particular facility. It is usually brought into place when the company is not operating “in conformity with current good manufacturing practices” , according the U.S. FDA website.
However, the U.S. agency has exempted 10 products from the import alert: Levetiracetam, Gabapentin, Lamotrigine, Capecitabine, Naproxen sodium, Raltegravir potassium, Atovaquone, Chloropurine, BOC core succinate and 2,4-wing active ester.
The company said in an exchange filing that it is working to address the concerns and resolve the matter.
Divi’s Laboratories, along with third party consultants, is currently working to address the concerns of the U.S. FDA and is making all efforts to fully meet the compliance requirements.Divi’s Laboratories in a statement released to the stock exchanges
Import Alert Impact
An import alert resolution generally takes around two-three years to resolve. Also, the drug maker could face risks from two sources: first, the fear of other regulatory agency taking note of the U.S. FDA’s import alert, and coming to inspect the unit, and second, clients cancelling orders, which could have a larger impact on the revenues in the future.
The company can de-risk by shifting the production to Unit-I but that unit is facing capacity constraints so they will have to de-bottleneck that facility for use, said Amey Chalke, analyst at HDFC Securities Ltd.
He added that the revenue contribution from Unit-II for U.S. market stands at around 25 percent. However, given some of the key products that have been granted an exemption from import alert, only 10-15 percent of the sales are at risk now.
The risk of other regulatory authority coming and inspecting the plant and giving similar observations will remain for next few months. There will be a sentimental impact and multiple de-rating owing to these risks. Higher remediation costs could impact EBITDA (earnings before interest, taxes, depreciation and amortisation) margins but costs will depend on what changes the FDA wants the company to undertake.Amey Chalke, Analyst, HDFC Securities
Shares of Divi’s Laboratories pared some of its early losses to trade 17.74 percent lower at Rs 650.4 at 11:20 a.m. The shares of the company are trading at 13.5 times its 2017-18 price-to-earnings ratio.
