FDA observations on Telangana plant a fresh headache for Aurobindo Pharma

The Telangana unit in question is an important one contributing about a fifth to US revenues

The Street’s confidence in the Aurobindo Pharma stock took a beating after it received unfavourable observations for one of its formulation units by the US drug regulator (the US Food and Drug Administration, or the USFDA).

The stock slipped to its single largest daily loss, shedding more than 19 per cent on Monday. The USFDA has issued seven observations after its recent inspections at the company’s Unit VII facility in Telangana. The unit — an oral dosage facility — remains important for Aurobindo; it has the largest number of abbreviated new drug approvals (about 140), according to Surya Patra of Phillip Capital, who feels near-term growth could be a challenge.

The Street fears the worst despite the clarification coming in from the company that none of the issues pertain to data integrity and it was confident of addressing the observations. The fact that the company’s three other units had been classified as Official Action Indicated, or OAI (typically this is followed by regulatory action) earlier in the year, the Street’s reaction to the current event was bound to be adverse. The three units under OAI included two active ingredient manufacturing facilities (Unit I and Unit XI) and an intermediates facility (Unit IX).

Indian pharma companies with exposure to the US market have been impacted due to pricing pressure on account of channel consolidation and higher number of approvals. The pricing pressures are now compounded by worries on growth led by the regulatory actions. Lupin continues to struggle with four plants under a warning letter, which keeps the Street cautious on growth. Glenmark, too, received a warning letter for a facility. Aurobindo, however, was looked at by the Street as a safer bet.

The company’s growth in the past was driven by both the US and European markets, with its strategy of turning around acquisitions working so far. Limited competition products, lower dependence on any single product have helped the company insulate itself against pricing pressures. The completion of the Sandoz product portfolio acquisition in the US is also looked at as a key growth driver.

However, the Telangana unit getting multiple observations is a fresh regulatory headache for Aurobindo. While the company could take remedial measures, investors remain concerned.

The plant contributes about 20 per cent to the US sales and 12.5 to the overall revenue, points out Amey Chalke at HDFC Securities, who feels the event may pose near-term growth challenges.