Here is our coverage of the Form 483 issued by the US FDA from the inspection of Divis Laboratories Unit-II located at Visakhapatnam. You can catch all our publications related to the Pharmaceutical Industry here. This is not a recommendation to buy or sell the stock. Analyst and family do own some of the positions listed here. Please assume we are biased.
Divis Laboratories or DIVISLABS when established in the year 1990 focused on production of Active Pharma Ingredients (APIs) & Intermediates.
Divis Laboratories set up its second manufacturing facility at Visakhapatnam (Unit-II). in the year 2002 on a 350 acre site. The site has 14 multi purpose production blocks.
The Unit-II at Visakhapatnam was successfully inspected by the US FDA during November 2006, April 2009, July, 2012 and June, 2014.
Now here are the events that resulted in the stock falling to its 2 year low of Rs. 783/- (a bitter fall from Rs. 1136/-) in a span of 6 trading sessions. 7-Dec-16 (Wednesday) : While all the action was limited to Sun Pharma’s Halol and Mohali facility inspection (you can find the coverage here), there were 2 other inspections conducted by the US FDA one for Alkem and the other for Divis both of which got little attention from the stock market or from the investors as US FDA inspection, Receipt of Form 483 or a Warning Letter became the new norm for pharmaceutical companies (you can find our coverage of here).
Here is what Divis Laboratories informed in its exchange filing:
The Company’s Unit-II at Visakhapatnam, Andhra Pradesh has had an inspection by the US-FDA from November 29, 2016 to December 06, 2016. The Company have been issued a form 483 with 5 observations and these shall be responded within the time permitted.
Nothing major since no one other than a handful of FDA inspectors, Company officials knew the exact observations or the severity of the issues. 23-Dec-16 (Friday) : Another day heading into the weekend, the stock got bombed in the second half as Emkay Financial Services shared their views on the Form 483 with CNBC TV18. This meant the stock tanked 17% intra-day and hit its 52 week low price.
Here is what Emkay said:
Proper control not being exercised over computer system
Facility equipments not maintained to ensure purity quality strength
Documentation and records not maintained or inaccurate falsified
Countering Emkay’s report, it took Divis more than 2 hours to come out with a clarification. The filing submitted to the exchange did not help much as it contained only legal jargons which meant absolutely no clarification on the points made by Emkay.
The company later went on to add:
Due process of reply to these observations requires Divi’s Laboratories to respond in detail and this is being done in time
These observations have not impacted our operations
Here is what analysts had to say:
The 483 observations received are all technical and procedural in nature; company is in process of filing its detailed response to the USFDA – Clarification from the management is sentimentally positive; but Unit 2 ( Vizag facility) is a key facility for Divis as it contributes 50%+ to sales hence the stock is down by 18%+; we advise to avoid bottom fishing and await for more clarity on the development.
The observations were later made public by the same agency that broke the news,
Proper controls not exercised over computerized systems used for analytical testing to ensure drug products meet their specified quality attributes
Facilities and equipment are not maintained to ensure the purity, quality, strength and identity of the active pharmaceutical ingredient (API);
The R&D division guides quality and production to commence activities inconsistent with CGMPs
Failure to conduct thorough investigation with respect to complaints received deviations in product batches; and
Documentation and records are either not maintained or inaccurate/falsified.
Today 31-Dec-16, we were able to get our hands on the Form 483. Here is our understanding of the issues highlighted by the US FDA team. You can download the Form 483 here:
Unknown impurities are neither accurately assessed by the company nor reported to the US FDA
The inhibit integration was used to mask the unknown impurities and the lot containing these was released in the market
The Deputy General Manager for Quality Check confirmed these impurities but failed to explain how then was the produce approved or even met specifications submitted to the US FDA.
There were no audit trails that could be reviewed by the US FDA team. This was for the R&D Division’s chromatographic systems. Also the US FDA team found 7 instances wherein the chromatographic sequences were obscurely named.
Presence of coloured residue/ staining/ material throughout the facility in the piping and on the campaign manufacturing / Use of dedicated equipment.
This was also an observation that one of the customer’s had complained i.e. Customer had observed dark particles in the sample of some product.
Equipment deficiencies was witnessed throughout the facility.
Products failed to meet the desired specifications in the various stages of production in which the R&D team approved the further processing of the product. This meant the batch which was sampled from, was approved and released in November, 2015.
Inter Office Memorandum between the R&D and the manufacturing block mentioned that the lab did not find the same abnormal result in lab experiments and since it was within the acceptable quality limit, the batch was approved for processing.
Of the 3 samples tested, R&D was of the opinion that the first two batches may have failed due to sample contamination without a proper investigation
The US FDA team found 9 such communications/ lapses which led them terming such lapses throughout the entire facility. It also confirmed that the R&D laboratories can support a lower number of products than that is produced at the facility.
Complaints were made on 28-Jun and 30-Jun in relation to the presence of metal particles in some batches which affected at the least 4 separate products.
The root cause analysis conducted concludes that the definite root cause could not be identified from the investigation as the majority of the batch was in line with the requirements and no abnormalities/ deviations were reported.
Inter Office memorandums confirmed absence of suitable alternative cleaning procedures for such heavy metals on 3-Sep-16.
Subsequently it was confirmed that the cleaning issue could not be resolved.
Inter office memorandum between Quality Check Department and R&D team dated 13-Apr-14 given for photocopy was falsified as the original document did not match the photocopy version.
Customer complaint log did not contain the customer complaint identified in the inter office memo dated 11-Apr-15.
Incinerator contained signed documents dating April 2016 including inter office memorandums clearly signifying destruction of important evidences.
Tags on equipment displaying the last cleaning date did not reconcile to the equipment usage log which meant that the cleaning activity could not be confirmed.
Our understanding signifies Observation 2,3, and 4 as highly critical. Even if Divis is able to prove that it did not willfully destroy evidence and implement new system controls so as to maintain an audit trial, the US FDA will not be satisfied until the company displays that all products that are being exported to the US have been manufactured as per the FDA’s cGMP practices and effective investigation is performed in relation to the foreign particles that have been witnessed in multiple products imported into the United States.
Considering this facility contributes in the range of 30-50% of the company’s total revenues, its subsidiary in the US Divi’s Laboratories USA, Inc which was formed to distribute dietary supplements and pharmaceutical ingredients in North America may also come under heavy inspection.
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