Latest FDA action is a 'sentimentally negative outcome' for Lupin

Lupin received yet another regulatory setback after the inspection of its Mandideep manufacturing facility (Unit 1) in Madhya Pradesh by the United States Federal Drug Administration (USFDA). The unit, which was classified as OAI or Official Action Indicated, may see an escalation of issues and difficulties in receiving approvals for new drug launches from there.

But, there are no new filings from the facility and no supply disruption is expected given the seasonality as cephalosporins (anti-bacterial) basket sales are less than $100 million. This is why analysts see a limited financial impact of the USFDA actions on the company.

However, given the fact that the company has already been grappling for some time with FDA-related issues over its two facilities at Indore and Goa, the latest development may add to already existing overhangs on the stock.

Analysts at Kotak Institutional equities believe that given the company’s lingering FDA issues, this is a "sentimentally negative outcome”. 

Those at a foreign brokerage observed that the “event raises concerns over the company’s ability to handle manufacturing-related issues”.

The company has slipped to being the seventh-largest pharma company in terms of market cap, from the second position three years ago. The reason it went out of favour was due to pricing pressure in the US market, especially on its diabetes portfolio that was responsible for driving its growth. 

What added to the pressure was the warning letters issued to its Goa and Indore units, which meant approvals for new products also got delayed. The annualised revenue contribution from new launches over the past 12 months at $60 million is lower than the estimated $100 million. Analysts at Nomura had lowered their expectation from new launches in February itself and also factored in a delay in the warning letter resolution.

Analysts at Motilal Oswal Securities, too, had said that the progress in resolving the warning letters for its Goa and Indore sites would be the key event to track over the next 3-6 months, in addition to key launches. 

Important launches which will drive US growth include generics of thyroid drug levothyroxine, angina drug Ranexa, and the gradual uptick of brand Solosec. The respiratory drug ProAir generics holds the key and will mark the entry into the speciality range of respiratory products (expected launch by end FY20). It is the monetisation of inhalers and biosimilars, among others, is being looked at as a major earnings driver for the company.

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