Ipca labs under pressure after USFDA closes inspection at Madhya Pradesh unit with 11 observations

The Ipca labs stock is under pressure as the company’s API manufacturing facility at Ratlam was issued 11 observations by the US Drug Regulator, the USFDA. The plant which is under a USFDA import slert since 2015 was inspected from June 5 to June 13. An import alert means the products manufactured at the plant do not fit US standards and hence are barred from the US unless stated otherwise.

Besides the Ratlam plant, 2 more plants one at SEZ Indore and the other at Silvassa, manufacturing formulations, are also under import alert since 2015. The Silvassa facility was also inspected by the US drug regulator in April this year and issued 3 observations.

News of the Silvassa and Ratlam facilities inspected this year was read as a positive as it gave hope that a successful inspection will clear the way for the import alert being lifted. However, the market is cautious as IPCA labs is believed to have data integrity issues which led to the sternest action of all, an Import Alert in 2015.

For Ratlam, while nature of the observations are not known the number of observations makes one assume it might take for the company to resolve their pending issues. For Silvassa, the street is awaiting the classification of the inspection in April which will determine the seriousness.

Plants are generally classified within 90 days of an inspection and the three classifications are either No Action Indicated, Voluntary Action Indicated and Official Action Indication. An OAI classification is indicative of possible regulatory issues.

The worst case analysts are assuming will mean a status quo on the import alerts. In that case analysts say India and other export markets would continue to be primary growth drivers as they have been since the regulatory issues began.

Lastly, the company announced buying 33.4 percent stake in Unichem for Rs 1,034 crore in April this year with an additional 26 percent stake via open offer at Rs 440 per share. Unichem sold its domestic formulation business to Torrent in 2017 only had its international formulation business remaining. This acquisition is expected to help Ipca regain a foothold in the US market as Unichem gets 55 percent of its international business from the US with 3 formulation and 3 API facilities with no pending US issues. On the flipside, the concern is that the deal would increase Ipca’s exposure to inherently low margin low return US and export business.