Inspections to go up, increasing conversion to warning letters could be a challenge for Indian cos: Report

Our Bureau, New DelhiTuesday, May 17, 2022, 08:00 Hrs  [IST]

Even as the regulatory inspections and related processes from the US drug regulator in Indian pharma manufacturing facilities expected to go up with the environment normalising after the peak Covid-19 wave now, the increased conversion of inspections to warning letters and Official Action Indicated (OAI) may delay the product approvals and launches thus impacting the growth prospects of the companies, says a latest brokerage report.

India, one of the largest suppliers of generic drugs to the US market, is the fourth highest exporter of drugs to the US, exporting around $9 billion of drugs in the calendar year 2021. It has also undergone the highest number of inspections by the US Food and Drug Administration (FDA) outside of the US, accounting for 14 per cent of the total inspections in fiscal year 2020.

Increased inspections were not only due to more ANDA filings, but also change of filings towards complex products, which require more scrutiny. These inspections were followed by observations/OAIs/warning letters, which kept impacting pharma supplies to the US.

“Inspections during the pandemic were only for critical drugs, but the environment is now normalising and the frequency of US FDA inspections is increasing. All this while, companies kept filing ANDAs resulting in a long list of products awaiting approval,” said the report by ICICI Securities.

“Our coverage universe has an average of 86 ANDAs pending for approval. Hence, US FDA inspection remains a double-edged sword for Indian companies. A clean chit from US FDA would provide opportunity for product approval and launches, but an adverse outcome could delay the same, further affecting growth,” it added.

Before Covid, the US FDA had issued a total of 220 warning letters in FY20 as against an average of around 150 per annum between FY15-FY20. The jump is in the number of ‘non-US’ countries – to 70 from a 5-year average of 52. China and India top the list of recipients, together receiving ~47% of total warning letters for the non-US segment in FY20 whereas the average between FY15-FY20 was ~60%, said the report. The conversion of inspections to warning letters for India has grown from five per cent in FY 19 (329 inspections of which 17 converted to warning letters) to seven per cent in FY20 (329 inspections, 22 warning letters).

At present, most Indian companies have been waiting for US FDA to begin plant inspections.

“However, early trends point that these inspections are ending with a high number of observations (nature of the observations remain unknown). Based on precedents, these observations would delay product approvals and launches denting growth prospects for the companies,” it added.

Sector valuations have reached a trough following steep price erosion in the US market due to high channel inventories among other macro causes. Adverse outcomes to the US FDA inspections could restrict valuations at these levels for extended periods.

According to ICICI Securities, Aurobindo Pharma has 225 ANDA filings pending approval, followed by Lupin with 152 filings pending, Dr Reddy’s with 116 filings, Sun Pharma with 114 filings, Alembic Pharma and Zydus Lifesciences with 92 filings each, and Cipla with 88 filings, among others.

The brokerage report advised that the investors would prefer companies with higher India sales, clear FDA status and pipeline of complex generics.

“US generics market is expected to remain under pressure due to continuous price erosion, delay in launches and uncertainty about US FDA inspection outcome. We believe India domestic business provides better growth visibility and margin sustainability. In the US, companies with a clean FDA record and pipeline of complex generics would prove to be a better choice for investment despite price erosion,” it added.