Lupin warn­ing sig­nals pharma a reg­u­la­tory mine­field

Mint Asia ST - - Mark To Market -


Ltd de­liv­ered a sucker punch to in­vestors hop­ing for a smooth res­o­lu­tion to its pend­ing reg­u­la­tory is­sues. Two plants had got ad­verse ob­ser­va­tions af­ter an in­spec­tion by the US drug reg­u­la­tor.

While the com­pany’s shares fell by as much as 17% on Tues­day, this set­back turned up the risk me­ter a few notches for the phar­ma­ceu­ti­cal sec­tor. Stocks such as Sun Phar­ma­ceu­ti­cal In­dus­tries Ltd and Dr Reddy’s Lab­o­ra­to­ries Ltd that have pend­ing reg­u­la­tory is­sues all fell on Tues­day. If in­vestors had thought maybe the worst is over, these devel­op­ments were a rude wake-up call.

In Lupin’s case, these plants were to get ap­proval in the near term, ac­cord­ing to the man­age­ment which was con­fi­dent it had ad­dressed the is­sues raised dur­ing the in­spec­tion. In­stead, the US Food and Drug Ad­min­is­tra­tion is­sued a warn­ing let­ter to the com­pany’s Goa and Pitham­pur–unit II which make for­mu­la­tions for the US mar­ket.

Since the ad­verse ob­ser­va­tions, new ap­provals have stopped from these units, which de­layed Lupin’s drug launch sched­ule. Prod­ucts al­ready ap­proved con­tinue to be sold. Even now, that will con­tinue. The warn­ing let­ter it­self, when it be­comes pub­lic, should dis­close rea­sons for the reg­u­la­tor’s ac­tions and what it ex­pects from Lupin.

So, what does the warn­ing let­ter re­ally do? Since the reg­u­la­tor is dis­sat­is­fied with Lupin’s re­sponse so far, it will seek more ac­tion. That length­ens the res­o­lu­tion time, means ad­di­tional costs and may even dis­rupt ex­ist­ing out­put. The com­pany needed a green sig­nal. Its sales in the US mar­ket are un­der pres­sure due to stiff com­pe­ti­tion and price ero­sion. A thin­ning prod­uct launch pipe­line has added to its woes. Where the mar­ket was ex­pect­ing these plants to be back on­line, they have dug them­selves deeper into a reg­u­la­tory ditch.

The un­cer­tainty cre­ated by the warn­ing let­ter and the lost sales due to de­layed ap­provals con­trib­uted to the sharp de­cline in Lupin’s share price. On the brighter side, an­other firm Divi’s Lab­o­ra­to­ries Ltd too had got a warn­ing let­ter in April (this plant had an im­port alert as well), which got re­solved in Novem­ber. That saw Divi’s shares in­crease by 17% in a day. That’s the out­come Lupin’s in­vestors will hope for. But each case is unique, and the out­come and Lupin’s res­o­lu­tion time may be dif­fer­ent. The next trig­ger should be the let­ter’s con­tents and af­ter that is di­gested, a long wait lies ahead.

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