More pain likely for Divi's Laboratories

The Visakhapatnam plant under import alert contributes about 20% to company's overall sales

The worst fears of the Street came true as Divi’s Laboratories got an import alert from the US FDA for its Unit II at Visakhapatnam. The facility had been inspected by the FDA in end November and had received five observations. The observations were serious in nature and raised concerns about data integrity and quality control systems, said analysts. Nevertheless, the company said that it is making earnest efforts on compliance and also had filed its comprehensive response to the observations within the stipulated time. The matter, however, has escalated now with company’s facility being issued import alert leading to the stock losing more than 17% on Tuesday.

The street’s concerns are understandable looking at the fact that the company derives about 36% of its sales from the US. The said facility contributes more than half to the US sales and about 20% to total sales of the company. Analysts at Edelweiss had been estimating about 30% impact to the company’s FY18 earnings if the matter escalates. The only respite for the company now comes from the fact that about 10 drugs have been exempted from the import alert. This could mean there could be a milder impact than was being anticipated. But, the fact that the matter may take long to resolve as has been the case with peers, and hence, growth may remain hampered raises concerns. The various import alerts issued to companies as Wockhardt and IPCA facilities about 2-3 years back have not seen resolution yet. Further, analysts also raise fears that the action in turn could also lead to some other order cancellations or loss of some clients, which will again keep street trying to gauge the impact of the action.

Divi’s has said that it along with third party consultants is working to address the concerns of US FDA and is making all efforts to fully meet the compliance requirements. While these efforts are encouraging, the remediation costs may also prop up overall expenses of the company. Thus, with sales suffering post import alert, margins may get some more beating which again needs to be watched for.

Further, analysts had pointed out that since the US FDA has inspected the plants, regulatory authorities of other developed countries thereby may also look at inspecting the facilities. Analysts at Motilal Oswal Securities, in their note post company receiving 483 observations had said, there is a high risk that the European regulator may also inspect this facility and given that Europe accounts for more than 40% of sales, the company cannot afford supply disruption to this region.

Thus, with many concerns and uncertainties cropping up with the import alert and also as experts try to gauge the impact of the same, investors should await for more cues to these issues.