Lupin warning signals pharma a regulatory minefield
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.