The recent warning letters issued by the US Food and Drug Administration (FDA), to manufacturing units of Indian pharmaceutical companies, have significantly raised investors risk.
With the FDA getting more stringent with its quality inspections and upcoming approvals for companies put on hold, investors are the ones who could lose out in the long-run, said analysts.
"Companies need to put things in place. Once the US FDA issues inspectional observations or '483' concerns and if it goes to the next level of warning letters, it will take a couple of quarters for things to get sorted out," said Abhishek Singhal, an analyst with Macquarie.
The reason for this delay is because the concerns that the FDA raised will have to be addressed and until that is done it will withhold approval for new products from those facilities. "The FDA will have to come and inspect the facility again and only once they are satisfied will approvals be granted. This will take time," he added.
Lupin, Cipla, Ranbaxy and Caraco Pharma, the US subsidiary of Sun Pharmaceuticals, have received '483' notices from the US FDA in the recent past. Lupin was issued a warning letter for its Cephalosporin facility at Mandideep, when the plant was inspected in November 2008. The FDA had initially raised 15 inspectional observations. The recent escalation into a warning letter raises concerns since a Cephalosporin product and a line extension of highly successful branded product, Suprax, are pending approvals from this site.
HDFC Securities VP (institutional research) Ranjit Kapadia said: "Warning letters pull down the stock price and delays in approvals could have 5-10% impact on the company’s performance. Products, which were to hit the market in 2009, will be especially impacted. But the seriousness depends on the company and the importance of the facility."
Ranbaxy, for example, has seen its stock price fall sharply since news broke of the warning letters and charges of falsified data and test results in approved and pending drug applications from its Ponta Sahib facility. The FDA invoked its 'application integrity policy' against Ponta Sahib Facility.
While it is assessing the validity of the data and information in all of Ranbaxy's applications with respect to Ponta Sahib site, it has stopped review of any new or pending drug approval applications that contain data generated by the facility. Analysts do not expect the issues to be resolved within the year and this could affect potential sales of Ranbaxy in 2010.
Cipla also received '483' notices at its Bangalore facility in April, which could reduce the comfort level of its partners, since it follows, a partnership-based model. In November, Sun Pharma's US subsidiary, Caraco Pharma, received a warning letter for its manufacturing facility and the FDA is withholding approval of pending new drug applications from that facility. "Increased regulatory risk would be an overhang in the near term and reflect on the sector’s valuations until the issues are resolved," said Mr Singhal.