Divi's Labs barred from exports to US after FDA import alert on Vizag unit

Unit under lens makes up 65% of firm's total sales; 15% of US sales could be hit, 10 products spared

In a big setback to Hyderabad-based active pharmaceutical ingredients (APIs) maker Divi's Laboratories Limited, the US Food and Drug Administration (USFDA) has issued an import alert on the company's Unit 2 facility at Visakhapatnam, Andhra Pradesh, though with certain exemptions.

The latest action comes after Divi's management had submitted a 700-page response in the light of Form 483 observations issued by the US drug regulator in December 2016. 

On December 7, 2016, the USFDA inspection team issued a Form 483 with five observations citing lack of proper control over computer systems, lack of proper maintenance of equipment and the documents at the facility.

The company cannot export products into the US from a site under import alert until the drug regulator reverses its action. Such a reversal would only occur once it is satisfied with the possible remedial steps taken in future.

The company's unit 2 contributes 65 per cent of the company's total sales, while its Unit 1 at Hyderabad accounts for the rest of the revenues. The company reported Rs 2,991-crore revenues for the nine-month period ending December 2016.

With Unit 2's exposure to US APIs being in the range of 20-25 per cent of the total revenues and the exclusion of 10 products from the import alert, the impact of the US drug regulator's action on the company's revenues could be limited to around 15 per cent of its sales in the next financial year, according to some analysts. Till now, the company has not respond to queries on the subject.

Following the news of the import alert, the Divi's scrip hit a 52-week low at Rs 635, close to 20 per cent down from the previous close at the beginning of trade on Tuesday. In a disclosure to the BSE, Divi's management said that the company, along with third party consultants, was currently working to address the concerns of the USFDA and was making all efforts to fully meet the compliance requirements.

While announcing the import alert, the USFDA has exempted 10 products from its action, including the epilepsy drugs Levetiracetam and Gabapentin so as not to create a possible scarcity for these lifesaving molecules in the market. It may be recalled that Divi's commands a 40 per cent market share for the Gabapentin API.

The other products that were excluded from the import alert are Lamotrigine, Capecitabine, Naproxen sodium, Raltegravir potassium, Atovaquone, Chlorpurine, BOC core succinate and 2,4-wing active ester.

Established in 1990 by its founder and Chairman Murali K Divi, the company has emerged as one of the key players in the generic APIs and API intermediates space globally over the years. Apart from APIs, Divi's also provides contract manufacturing services to a number of global pharmaceutical companies. The company has never faced such an adverse regulatory action in the past.

As 88 per cent of its total revenues (Rs 3,815 crore in 2015-16) come from the export markets, a similar reaction by the drug regulators of other countries in Europe and elsewhere might spell trouble for the company's revenues in the near to medium term if the company fails to address the concerns flagged by the US regulator the earliest.

For the past one year, the company has been investing in the capacity expansion of existing facilities as it was facing some delays in establishing a third green-field facility near Kakinada. The US FDA's action makes the ongoing brown-field expansion at the Vizag facility largely ineffective.

In August last year, Mumbai-based Wockhardt Limited's Ankleshwar plant got a similar import alert. Hyderabad-based pharma major Dr Reddy's Laboratories has been facing compliance issues ever since the US FDA had issued a warning letter citing quality protocol and other issues at three of its manufacturing facilities in November 2015. In the case of Divi's Vizag facility, the US drug regulator has directly announced the import alert.