US FDA: a risk that keeps on giving

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Aurobindo Pharma Ltd’s share had been on a roll since 21 February, gaining 9.3% till Thursday. Those gains could be one reason why its shares fell sharply on news that a US Food and Drug Administration (FDA) inspection at its facility ended with nine observations.

Its shares closed with a loss of 3.7% as investors feared it may face delays in resolving the issue, although it is unclear how serious these observations are. The company clarified there were no repeat observations or data integrity issues, but that did not really placate rattled investors.

The observations came after an inspection of the company’s Unit IV. The management had said that two units—Unit IV and Unit XII—were due for inspection, in a conference call after its December quarter results. Unit IV was also one in which there were three drug recalls, of which one had been addressed, and corrective work on the two others were in progress, the management had said in the same call.

Unit IV is a sterile injectables unit and as the name suggests, the standards expected of an injectables unit are higher than an oral formulations unit. Products made at such facilities also earn relatively higher margins, since there are fewer injectable units compared to those that make oral solids. They are expensive to set up and getting regulatory approvals is not easy. They add considerable value to a company. And some of the large domestic acquisitions made by foreign companies have been of sterile injectable facilities.

That’s why this unit is material for Aurobindo, with 89 generic drug filings, of which it had final approval for 50, two tentative approvals and 37 pending as of 31 December. Its injectables business contributed $46 million or 15.6% of its US revenues in the December quarter.

Coming to the observations themselves, they pertain to cleanliness and maintenance of equipment, infestation in the building, equipment used not being of proper design, lack of training among employees, laboratory control mechanism not being followed and appropriate controls over computers not being maintained, according to a BloombergQuint report. On the face of it, they may seem mild in nature but it is risky to jump to any conclusions.

The drug regulator will await a written response from Aurobindo, explaining the reason for these deficiencies and how it intends to resolve them. If the response is entirely satisfactory, a short wait later the matter will be resolved. This is the best case scenario.

In some cases, another inspection may be required to see if the deficiencies have been taken care of, which could take time. A second inspection could uncover more deficiencies. This adds to the delay. However, the regulator may not find the response satisfactory, either on the explanation for the deficiency or the proposed remedy. That can escalate matters and even result in a warning letter, which could then stop fresh drug approvals to the unit. This can then delay the whole process for much longer. So, the resolution could take anywhere from a few months to over a year or more, depending on what happens next.

It is that fear of not knowing where the US FDA will draw the line that is causing investors to take some money off the table. There have been instances in the past where the Street has taken a sanguine view on observations, only to be startled later by an escalation. They will wait a positive response from the US FDA or mitigating factors elsewhere in Aurobindo’s business to change their mind.

This episode underlines the fact that the US FDA’s regulatory glare on Indian pharmaceutical companies is not going away. If companies are becoming wiser on data integrity and keeping a tight lid on old problems, the inspectors are uncovering problems they may have missed or ignored earlier. Unless companies go over their facilities with a toothcomb just like the inspectors are doing, even if it means a much higher cost of compliance for the US market, they will regularly trip over inspections, and investors will too.livemint