Dr Reddy’s, others in for tough times as USFDA warnings loom

New product approvals, margins are likely to be at risk in the wake of warning letters from the US health regulator

Hyderabad: The multi-billion dollar Indian pharmaceutical industry dominated by the likes of city-based Dr Reddy’s Laboratories and Sun Pharma is likely to face challenges in terms of margins and new product approvals this year in the wake of some major companies receiving a slew of warning letters and import alerts from the US Food and Drug Administration (USFDA).

In 2015 alone, the US health regulator issued nine warning letters (WLs) to Indian pharmaceutical companies with Dr Reddy’s Laboratories Limited, India’s second largest drug maker, and Cadila Healthcare accounting for the highest among the lot with three each. Sun Pharma, the country’s largest pharmaceutical company, and two other companies were served with one each.

A recent report by rating agency ICRA had put the total number of WLs received by Indian companies since the year 2008 at around 50. Most of the WLs are related to the manufacturing practices adopted by the companies and nearly 40 per cent of the warnings have been converted into import alerts (IAs), a move that will invariably impact sales.

“The issuance of WLs and IAs for India-based manufacturing facilities has increased significantly over the past couple of years following USFDA’s greater focus on compliance of CGMP guidelines by pharmaceutical companies,” pointed out the ICRA report released earlier this month, citing the Current Good Manufacturing Practice (CGMP) set by the USFDA for pharmaceutical manufacturers.

With slew of warning letters being issued to some of the leading pharma companies in the recent past, such regulatory actions are steadily emerging as a key risk for the sector as they hold potential to delay product approvals and launches in the US, it added.

The rating agency says these developments will put pressure on margins of the companies already hit by intense competition. “In an environment where companies are going through pricing pressure owing to increased competitive intensity, these developments are likely to add to margin pressures,” it reasoned.

However, it doesn’t see any adverse impact on the overall credit profile. “Nonetheless, we believe that the credit profile of affected entities is unlikely to be impacted in view of their strong balance sheets and liquidity,” the rating agency maintained.

Meanwhile, India Brand Equity, a trusted established by Commerce Ministry, painted a rosy picture for pharmaceutical sector in the country. It expects the sector to expand at a Compound Annual Growth Rate (CAGR) of 15.92 per cent to $55 billion by the year 2020 from $20 billion in 2015, according to its recent report.

Indian drugs are exported to more than 200 countries in the world, with the US as the key market. The country accounts for about 2.4 per cent of the global pharmaceutical industry in value terms and 10 per cent in volume terms.