Heightened FDA Scrutiny ‘Key Risk’ For Indian Pharma: ICRA
This article was originally published in PharmAsia News
Executive Summary
US Food and Drug Administration Warning Letters are emerging as an important risk for India's pharmaceutical sector, says leading investment rating agency ICRA, with such notices climbing by 143% in calendar 2015 from the previous year.
NEW DELHI - Tighter FDA scrutiny has upped the financial risks for India's pharmaceutical sector, with the US regulator issuing 17 Warning Letters to domestic drug companies in 2015 - an increase from seven the previous year, credit rating agency ICRA Ltd says.
From 2008 to 2015, the FDA sent some 50 Warning Letters over issues from factory floor cleanliness to data manipulation, Subrata Ray, ICRA senior group vice-president, told PharmAsia News. In 2008, the FDA sent just three Warning Letters. In 2012, when the US passed legislation obliging the FDA to inspect global plants on the same schedule as domestic ones, it sent only one to an Indian facility.
Of these 50 Warning Letters, 40% escalated into Import Alerts, meaning companies cannot export products from affected plants to the US until they meet FDA standards, a new ICRA report shows. "With the slew of warning letters being issued to some of the leading pharmaceutical 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,” Ray said in an email interview.
Since November, for instance, some of the biggest Indian pharma names such as Sun Pharmaceutical Industries Ltd., Dr. Reddy's Laboratories Ltd., Cadila Healthcare Ltd. and Ipca Laboratories Ltd. have been hit with FDA notices. In the case of Ipca, the FDA website said in early February it appeared employees routinely hit the delete button on failed analytical test data, substituting "passing results."
The US accounts for 30% of the $15bn Indian pharmaceutical sector’s exports. Many plants named in Import Alerts are key to US sales. In the case of Wockhardt Ltd. and Ipca, both of which have factories now under Import Alerts, their US sales have "come down sharply," the ICRA report notes.
“[Warnings letters] are emerging as a key risk for the [pharma] sector as they hold potential to delay product approvals and launched in the US.” – ICRA’s Subrata Ray
Same Standards Globally: FDA
Separately, FDA deputy commissioner Howard Sklamberg rejected suggestions sometimes made by Indian government officials and pharmaceutical firms that the regulator targets Indian drug makers unfairly. Some Indian government officials and companies complain the FDA focuses too much on relatively minor manufacturing lapses that are "process" rather than quality related.
They say the cheaper Indian generics industry is a victim of “smear campaigns” by US brand name multinationals. India supplies 40% of generic prescription and over-the-counter medicines sold in the US (Also see "US Lawmakers Hit FDA Over ‘Inadequate’ Scrutiny of Indian, Chinese Sites" - Scrip, 4 Jan, 2016.).
“We apply the same standards of inspecting…across all geographies,” Sklamberg told reporters in Ahmedabad while attending an industry conference, The Press Trust of India news agency reported. The FDA website shows 42 current Import Alerts for India, the same as in China, and five more than Hong Kong.
Still, the heightened FDA oversight is coming at a bad time for Indian pharma companies, adding to margin pressures when they're already grappling with stronger competition and currency market volatility. These factors could almost halve annual growth in pharmaceutical exports to 8% by 2020 from 15% between 2010 and 2014, a recent report by TechSci Research and Indian industry group Assocham forecasts (Also see "Dr. Reddy’s Warns Over Currency Effects As Emerging Markets Slide" - Scrip, 10 Feb, 2016.).
US-bound pharmaceutical exports have already suffered a sharp decline in the year-on-year growth rate to 9% in 2014 to $3.76bn from 38% in 2011, the TechSci study quoted government figures as saying. Consolidation of North American pharmacy players will likely grease the export decline over the next five years, the report forecast.
Worldwide, the generic industry is seeking scale benefits but consolidation in the highly fragmented Indian market has been limited.
"The cost impact of regulatory measures would vary on a case-to-case basis - on average, we expect the cost impact for regulated market-focused companies to range between 50-to-150bps [basis points]," Ray said. “Resolution of enforcement measures can take a few months to more than year along with associated remediation costs. It also impacts ANDA (abbreviated new drug application) approvals and registration with delays in product introduction and can result in significant revenue losses,” he added.
Big Companies Have 'Superior" Track Record
The majority of FDA Warning Letters are resolved within 12-15 months with the average time-frame being 24 months. Not unexpectedly, large pharmaceutical companies have a "superior track record" in resolving FDA issues than medium-sized ones, Ray noted. For example out of nine Warning Letters cited in the report resolved so far, 78% involved large companies, ICRA said.
The rate of escalation of Warning Letters to Import Alerts is also higher for small and mid-size companies. “For larger players, the cost of remediation appears less onerous due to scale benefits. Further, it becomes easier for larger companies to take measures like dual filing and site transfer to hedge against unfavorable regulatory actions,” Ray said.
“For larger players, the cost of remediation appears less onerous due to scale benefits.” – ICRA’s Ray
“In most instances, Warning Letters and Import Alerts may only have a temporary impact on company performance [but] in the event of severe observations - either leading to prolonged ban on manufacturing facilities and or high remediation costs, may have impact on credit profile,” he added.
Still, “most of the large formulations companies, which have significant revenue generation from developed markets, enjoy high profitability and comfortable debt metrics. The cost increases on regulatory compliances should be easily absorbed by these entities, without straining the credit metrics,” Ray said. "Credit profiles are unlikely to be impacted."
But some firms have paid heavily for infractions like Ranbaxy Laboratories Ltd., acquired last year by Sun Pharma. When still a standalone firm, it paid a record $500m US fine for falsifying data and misleading regulators. Four Ranbaxy plants are under import bans while Sun is completing "remediation commitments" at its biggest plant, Halol, after an FDA Warning Letter late last year (Also see "Sun Lays Out Halol Compliance Plan As Results Trounce Forecasts" - Scrip, 14 Feb, 2016.).
There are common threads in FDA notices to Indian firms, ICRA noted, including failing to meet current good manufacturing practice (cGMP) guidelines during research and development, validation and manufacturing and lack of proper manpower training programs and management systems (Also see "FY 2015 Drug GMP Warning Letters Hit Compounders and Foreign Sites" - Pink Sheet, 29 Jan, 2016.).
Some compliance costs are one-offs but others are ongoing. As a result of closer FDA checks, pharmaceutical companies now must review their R&D and manufacturing procedures, implement comprehensive action plans and even conduct risk assessment of products already in the market.
Firms Must Respond Quickly
If the FDA detects severe cGMP deviations, it has told companies to get third parties to evaluate remediation efforts. In addition, companies have also been undertaking site transfers - especially for major launches - and pursuing filings from dual locations for future ANDA to hedge against any unfavorable FDA actions.
"These measures are likely to entail significant resources and impact earnings of select companies in the near-term," ICRA said, but added, "Adherence to the FDA's directives and site transfer in a timely manner are vital to mitigate business risk."
The message is coming home to Indian firms they must comply with cGMP to head off FDA action. Some are setting up "quality cells" in their plants and Sun Pharma is establishing a quality management staff training institute. Firms are encouraging employees to sound the alarm if they detect anything wrong rather than seeking to please with consistently “good news” test results..
“These measures are likely to entail significant resources and impacts earnings” of some companies in the near-term,” ICRA said, but ultimately, these measures “will ensure increased quality adherence in long term.”
The Indian Pharmaceutical Alliance also in late February set up a Quality Forum to address regulatory issues and is confident the sector can overcome problems "with appropriate guidance, periodic dialogue and support of the regulators," the secretary general Dilip Shah said.
As part of stepped-up cooperation, the FDA said on its website Feb. 24 it has trained 200 Indian regulators in Ahmedabad and Bangalore to increase their knowledge and help “learn more about the regulatory perspectives of the other.”
In India, drug safety is generally assessed by testing samples while in the US, the manufacturing process is strictly regulated and the product doesn’t pass if any breaches are detected.
An Assocham report last year said a "severe shortage" of skilled inspectors was creating international regulatory hurdles for local firms.