US FDA’s surprise audit of plant briefly stalls the rise of this high-flying pharma stock

Granules India Ltd came under the US Food and Drug Administration’s lens recently, briefly slamming the brakes on the high-flying stock that generated 127% returns over the past year.

The stock came under selling pressure as the FDA continued a week-long surprise audit at one of the company’s key facilities, according to a CNBC-TV18 report last week. Shares of Granules India fell about 4.7% to ₹683.75 on the BSE on Monday after fluctuating between gains and losses in the previous week. Yet, it has outperformed all its peers.

Even though the inspection is not immediately bad news, it makes investors jittery, leading them to book profits, analysts said. The pharma sector has generated good returns in the past couple of months and at current valuations, investors will take profits whenever they find a reason to, according to analysts.

Granules India shares recovered on Tuesday, advancing 1.2% to ₹691.75 on the BSE at 11:33 am IST.

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The FDA has been conducting the audit at Granules' Gagilapur facility in Hyderabad since last Monday. The facility, which makes finished dosages and formulation intermediates, contributed more than 70% of the company’s revenue in the quarter ended June, according to media reports.

Concentrating a significant portion of revenue in one facility is a risk for the business and if the FDA takes any action, it will significantly impact Granules' operational capabilities, analysts said.

Currently, Granules has 16 ANDAs (abbreviated new drug applications) pending for approval from the FDA, and 11 are from the Gagilapur facility. The regulatory body has so far approved 36 ANDAs from this facility.

The broader pharma sector was marginally down on Monday, with Aurobindo Pharma, Sun Pharmaceutical Industries,Cipla,Lupin, and Dr Reddy's Laboratories ending about 1% lower at the end of the trading session.

Regulatory glare

All these companies, which posted average annual returns of about 63%, have come under FDA scrutiny over the past year. Some received warning letters while others were paid surprise visits in the quarter ended June.

Approvals for Aurobindo Pharma’s new drugs declined due to regulatory issues found at a manufacturing facility of its subsidiary Eugia Pharma. Cipla received six inspectional observations in June after an FDA inspection of its Goa facility.

The Indian pharma industry was thrust into the international spotlight in 2022 for exporting allegedly contaminated drugs that led to the death of children in Gambia and Uzbekistan. Since then, the industry has found itself under the microscope.

Following an investigation in June, the FDA found violations in 11% of the facilities inspected in the country. Additionally, it found data integrity issues in drug manufacturing research organisations.

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As a result, the number of ANDAs approved by the FDA fell to its lowest level in eight quarters in the three months ended June. Companies use ANDAs to seek approval from the FDA to market a generic version of an already approved ‘reference’ drug in the US.

Analysts said if compliance standards remain subpar, these inspections might become a pain point for pharma companies that are focused on expanding their more profitable drug formulation business in the US.

“Our strategy is always to keep on increasing FD (finished dosage business) … and the US has always been a very strategic market for us,” Krishna Prasad, chairman of Granules India, said on a recent earnings call. “Our service levels, our quality and compliance, that I am sure you have seen in the news that we have had absolutely no issues.”

Brighter prospects

Despite the regulatory hiccups, US-centric pharma companies are positioned to do well in the next couple of years, market participants toldMint.

Upcoming patent expiries, restrictions on Chinese biotech companies because of the new Biosecure Act and falling price erosion are likely to bode well for Indian pharma companies in FY25-26, according to analysts.

Granules reported a 20% on-year growth in revenue to ₹1,179 crore in Q1 of FY25 owing to strong demand for its drugs in the US. Its net profit almost tripled to ₹135 crore because of higher sales of its finished dosages.

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“The company expects to launch an additional three to four new products in the US and eight products in other geographies in subsequent quarters in FY25,” Dolat Capital said in a report. “With a ramp-up in new launches in the US and other geographies coupled with improved volumes, we expect (the) FD segment revenue to grow at a compound annual growth rate of 26% over FY25-26.”

Granules recently said the FDA had approved the ANDA for its Glycopyrrolte Oral Solutions or generic Cuvposa Oral Solution that is used to treat children with drooling problems.

As the FDA tightens its screws, pharma companies must adhere to best practices, market participants said. Or else such scrutiny will continue to be a fly in the ointment for Indian pharmaceutical companies even with brighter prospects.