March 22, 2017 / 11:42 AM / 4 months ago

U.S. bans Indian drugmaker Divi's factory, shares hit 3-year low

4 Min Read

Pharmaceutical tablets and capsules in foil strips are arranged on a table in this picture illustration taken in Ljubljana September 18, 2013.Srdjan Zivulovic/Files

MUMBAI (Reuters) - U.S. health regulators have banned a drug production site in India belonging to Divi's Laboratories Ltd due to manufacturing violations, sending the company's shares down to a near three-year low on Wednesday.

This comes at a time when an increasingly protectionist stance by U.S. President Donald Trump is threatening to make the operating environment tougher for India's drugmakers that supply nearly a third of the medicines sold in the United States - the world's largest healthcare market.

The U.S. Food and Drug Administration's ban on Divi's Unit II factory in the eastern Indian city of Vizag - news of which was posted on the FDA website and seen by Reuters on Wednesday - is the second setback this month for India's drugs industry.

The FDA found violations of manufacturing standards at Dr Reddy's Laboratories Ltd's drug plant, also in Vizag, during an inspection that ended on March 8, according to a copy of the inspection report seen by Reuters on Wednesday.

Several analysts downgraded Divi's stock to "sell" and others such as Jefferies maintained their "underperform" rating on Reddy's stock, citing increasing regulatory challenges.

About 70 percent of Divi's total sales that depend on the plant are now under threat as other countries may go after the factory, prompted by the FDA action, said Edelweiss analysts.

Divi's did not respond to an email requesting comment on Wednesday, but said in a statement to exchanges that it had started necessary measures to address the FDA's concerns.

Shares in the company have plunged 18 percent this week and were mired near a three-year low of 611.45 rupees ($9.34) on Wednesday. Dr. Reddy's stock hit 2,555.20 rupees earlier the day, also their lowest since 2014.

Reddy's Repeat Violations

Dr Reddy's told Reuters it plans to submit "a comprehensive response" to the FDA, which said it had found multiple repeat violations at the site - including problems that the agency had notified the company of as far back as in 2015. Issues listed in the report included data manipulation, as well as a Dr Reddy's employee lying to FDA inspectors.

"We are confident in our ability to address these observations and will work with U.S. FDA in resolving these issues," Dr Reddy's Chief Financial Officer Saumen Chakraborty said in an emailed statement.

Analysts, however, say the FDA report could be a risk for Dr Reddy's all-important oncology pipeline, which has been a key area of focus for the company as it looks to improve its business in the United States, its largest market.

"These (FDA) observations significantly increase the risk of delay in resolution of Srikakulam facility also," Jefferies analysts said in a report on Tuesday, referring to another Dr Reddy's plant that is under scrutiny.

The FDA has banned more than 40 Indian factories in recent years over quality control failures and manipulation of data.

Companies say they have been working on improving their processes, but major issues continue to be found at some of India's biggest drugmakers, dealing a blow to the industry's image as a reliable supplier of cheap generic medicines.

($1 = 65.4700 Indian rupees)

Reporting by Zeba Siddiqui in Mumbai; Editing by Himani Sarkar

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