Much of the success of Aurobindo in US market in recent years was due to much cleaner compliance track record compared to the peers in the industry.
Aurobindo Pharma, the top performing drug company in India by revenue growth and stock returns in FY19, is now faced with USFDA compliance issues at four of its manufacturing sites.
The company’s three facilities Unit I (Medak, Telangana), Unit XI (Pydibeemavaram, Andhra Pradesh), and intermediates facility of Unit IX (Medak, Telangana) were classified by USFDA as Official Action Indicated (OAI).
The USFDA classifies its inspection as OAI for plants found in an unacceptable state of compliance with regard to current goods manufacturing practices (CGMP). The agency will intimate the company about the classification within 90 days of the inspection.
While an OAI classification doesn’t impact existing supplies and revenues from operations of the facilities, it blocks new product approvals filed from the site. In addition, it may even trigger a warning letter or an import ban if companies fail to satisfactorily address the concerns raised. The OAI also increases the spend on remediation.
The USFDA inspection is said to be triggered due to the ongoing Sartan impurity issues triggered the inspection. Sartans are drugs used in treatment of controlling blood pressure. USFDA is cracking down on manufacturing sites producing Sartans after reports of the drug containing carcinogenic impurities that could have seeped because of manufacturing process.
Aurobindo management assured analysts in their latest earnings call, saying that the OAI status on its three plants isn’t going to disrupt existing supplies from the facilities, and only five to six products pending for approval may get impacted. Aurobindo has 100 plus pending approvals.
It didn't end there, early this week the US drug regulator issued 10 Form 483 observations on the company’s Unit III, a formulation manufacturing facility located at Bachupally, Hyderabad.
Aurobindo responded by saying that none of the observations are repetitive and are more procedural in nature.
USFDA makes its observations on Form 483 at the end of the inspection of a plant. The company will have to respond to those observations within 15 days detailing preventive and correction action.
Investor concerns
Despite Aurobindo's assurances, the damage was done. Aurobindo stock fell by 14.5 percent from May 17, and is trading Rs 619.80 at close on June 7.
To be sure, any adverse action from the USFDA sends jitters to Aurobindo, as the company derives close to half of its revenues from US. Aurobindo'sUS revenue in FY19 grew 21.3 percent YoY to Rs 9,030.7 crore.
Much of the success of Aurobindo in US market in recent years was due to much cleaner compliance track record compared to the peers in the industry.
Analysts assume Aurobindo's US revenues are expected to grow upwards of 25-30 percent in next two years with the integration of Sandoz generics portfolio, which it acquired for $900 million in September 2018.
However the ghosts from its past also haunt Aurobindo's investors.
In 2010, USFDA inspected two units in Telangana and found significant violations of good manufacturing standards. The regulator then issued a warning letter to the company along with an import alert in February 2011.
The import alert was revoked in March 2013, but Aurobindo's growth was severely curtailed during those three years. Those difficult years taught the company important lessons on maintaining high regulatory standards.
Analysts are confident about Aurobindo's growth story.
"Today Aurobindo is a much bigger company, with a vertically integrated supply chain backed by 28 manufacturing facilities both in India and abroad," said an analyst who did want to be named.
"The stock decline is more due to the OAI status," said Amey Chalke, Pharma Analyst at HDFC Securities.
"The OAI if turned into an import alert will be the worst outcome, anything below it, isn't going to impact the company significantly," Chalke said.
