USFDA rap to Lupin unit pulls down stock

While concerns are understandable looking at the impact of USFDA, observations on Lupin haven't alarmed analysts

The US Food and Drug Administration (FDA)’s observations on Lupin’s Goa plant made the Street nervous with the stock falling nearly seven per cent on Tuesday. The company, in a clarification to the stock exchanges, said the US FDA had inspected its Goa facility last week and issued nine observations on inadequacy in adherence to standard operating procedures, to which the company is preparing responses.

While the Street’s concerns are understandable looking at the impact of FDA actions on Wockhardt, IPCA Laboratories, Dr Reddy’s and Sun Pharma, the current observations on Lupin have not alarmed analysts yet. The observations seem to be pertaining to routine procedures and compliance and do not indicate much towards any alarm on manufacturing practices, say analysts. Sarabjit Kour Nangra at Angel Broking says that according to available information, nothing negative can be interpreted.

Lupin’s Goa plant had been inspected by the FDA in 2015 and the company had responded to the observations. The plant was re-inspected by the FDA last week. But, if the situation worsens with the FDA issuing warning letter or import ban, it could have significant downside because the plant supplies oral solids and formulations to the US, Europe and Japan, which are important geographies. The Goa plant accounts for about 40 per cent of Lupin’s US revenues, which in turn account for nearly half the consolidated top line. Simply put, 20 per cent of Lupin’s total revenues come from this plant.

While Tuesday’s news might have raised concerns, Lupin has been in limelight on positive news flow till last week. On March 9, it completed the acquisition of Gavis Pharmaceuticals, a deal it announced in July 2015. This acquisition is likely to fuel Lupin’s growth in the US market. The stock was also upgraded by Nomura on March 7, wherein the brokerage indicated a target price of Rs 2,110, looking at strong market share gains in the US for its anti-diabetic products. While the Glumentza generics launched on exclusivity have attained 58 per cent market share, prescription flow for the generics of Fortamet also continue to get good traction despite 2.5 times price hike undertaken. The stock had gained a good 10 per cent from its recent closing lows in February, before the latest US FDA concerns led to a sharp correction on Tuesday.