Emcure Pharmaceuticals (part of Emcure Group – Emcure USA, Gennova, Zuventus, Heritage and Tillomed Laboratories). The company is neither listed on the National Stock Exchange nor the Bombay Stock Exchange. The Media section of the company’s website does not even a word about this warning letter as well. Due to this, the significant financial impact of these 3 events cannot be ascertained. But it gives us a warning of the issues faced by Indian pharma.
EPL was incorporated in April 1981 by Mr Satish Mehta and is engaged in the manufacturing of formulations and Active Pharma Ingredients (API).
The company has four manufacturing facilities in Pune and one in Jammu. These facilities are accredited by regulatory authorities such as US Food and Drug Administration (USFDA), Therapeutic Goods Administration (TGA) – Australia, Canada Food & Drug Administration, etc, and are also compliant with the Current Good Manufacturing Practices (CGMP). Furthermore, the company has three dedicated Research and Development (R&D) facilities for APIs and formulations.
There were 3 significant events last week. The first being the warning letter from the US FDA over the shabby manufacturing practices, the second is Health Ministry ban on 344 fixed drug combinations through a gazette notification and the third is the note of this weakness but no downgrade of their 1300 cr. loans by CARE.
Let us cover the first event first: US FDA Warning
On the 3-Mar-16 (Thursday), the US FDA issued a Warning Letter to Emcure Pharmaceuticals. The letter was in relation to the:
- Inspection performed during 27th January, 2016 to 4th February, 2016 at Plot No. P-1, IT BT Park Phase II, MIDC, Hinjwadi, Pune 411 057, Maharashtra, India
Here is a summary of the issues (You can read the full warning letter here):
- Absence of SOP’s to prevent microbiological contamination
- Absence of Laboratory controls in relation to specifications, standards, sampling plans, and test procedures
- Incomplete laboratory records – complete data derived from all tests were not recorded
The report shows that manufacturing processes aren’t very well organized and there is a significant chance of fudging through incomplete data, or by lax controls. This seems to be an issue with Indian pharma.
Here is the second event: Health Ministry ban affects Emcure Pharma
Over the weekend, the Health Ministry banned 344 fixed drug combinations through a gazette notification. These include several common cough syrup solutions, analgesics and antibiotic combinations, many of which are sold over the counter. The ban, which comes into effect immediately, follows recommendations of an expert committee formed to examine the efficacy of these drug combinations.
You can download the complete Gazette here. Below here are the products of Emcure Pharma impacted by this ban (Thanks to Vikas Argod for compiling this list)
Here is the third event: CARE reaffirms 1302 Cr Debt with regulatory caution
On the 9-Mar-16 (Wednesday), the credit rating agency CARE or Credit Analysis & Research Limited issued a “Reaffirmed” remark on the company’s credit profile – the company has over Rs. 1300 cr. of loans from banks.
Here is what the rating agency said (Brief Rationale):
The ratings are, however, constrained by the intense competition in the generic formulations industry along with regulatory risk inherent in the pharmaceutical industry. The ratings further take a note of the ongoing debt funded capital expenditure (capex) in group companies and debt funded acquisitions of two Canadian pharmaceuticals companies.
Our View
The US FDA Ban would be a significant impact for Emcure Pharma and the fear looms over the entire Pharma Industry as Dr. Reddy’s, Cadila and Sun Pharma have each been issued warning letters in the past. From Wockhardt to Lupin, FDA concerns have seen stocks tank more than 5%, and any investment in pharma should understand that the regulatory risk – sometimes just perceived risk, like in the recent Lupin situation – will cause markets to move big time. Ennore may be unlisted but it’s quite apparent now that the listed players won’t be spared either. The player that fixes these things – even if they hurt margins – will probably survive better.
Disclaimer
Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.
Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.
