Can This Historically Clean Pharma Pack Overcome Recent Regulatory Challenges?

Since some time, Indian pharma players have faced problems from global regulators relating to noncompliance of good manufacturing practices (GMP).

However, throughout the whole episode, one group of pharma companies has been largely unaffected - the CRAMS (contract research and manufacturing services) players.

These companies provide cutting-edge, low-cost solutions to MNC drug companies. Their services range from supplying active pharmaceutical ingredients (for existing generic and branded drugs as well as drugs under development) to providing R&D services (companies providing R&D are known as contract research organisations or CROs).

Given various global and some domestic companies depend on CRAMS for their supplies, CRAMS' facilities are often audited by their customers (the buying pharma companies). So CRAMS tend to pay close attention to their processes and product quality.

With a high reliance on export revenue, the nature of their business too calls for tighter internal controls and risk management. And this has held them in good stead. It's why most CRAMS have been able to stay off the regulator's naughty list. Historically, these companies have easily passed audits.

As a result, most of these CRAMS players have managed to weather the regulatory issues relatively better than their non-CRAMS counterparts.

But that seems to be changing...

Around the fag-end of 2016, one of India's leading contract research company came under the USFDA's scanner. This company has the best margins of all Indian CRAMS, and it's a leading supplier of specialty drugs to global companies. Indeed, Divis Laboratories is a success story any Indian CRAMS player would envy.

But last month, Divi's received Form 483 from the USFDA with five observations on its facilities at Visakhapatnam (Unit-II), where it manufactures APIs and intermediates.

The observations included:

• Lack of proper control over the computer system
• Facility equipment not maintained to ensure purity quality strength
• Documentation and records not maintained, inaccurate, or falsified

The US market accounted for 32% of Divis' business in FY16, and the Visakhapatnam plant contributes around 50% of total US sales.

Historically, the company has largely remained compliant with GMP norms. However, the issues raised by the USFDA relating to the falsification of data are likely to be escalated to a higher level. A case of data integrity or data manipulation makes the observations more serious.

The company's market cap eroded almost 35% since the negative observations.

Another CRAMS company that has come under regulatory scrutiny recently is Granules India. It received eleven observations from Infarmed, the Portuguese drug regulator, for its facility at Gagillapur, Telangana, which manufactures intermediates and finished dosages.

The observations came after the Portuguese regulator conducted a renewal inspection of the facility. Infarmed asked for a suspension of commercialisation and an immediate collection of specified batches of medicines.

The Gagillapur plant is one of Granules' six plants in India. It's the only plant in India manufacturing intermediates and formulations. The other plants that manufactures these are located in the US state of Virginia.

This facility also holds approvals from global regulatory authorities including the USFDA, COFEPRIS (Mexico), and TGA (Australia). So the big risk now is if other agencies also decide to inspect the plant.

Granules' stock price tanked nearly 10% after the announcement.

The Road ahead for CRAMS

As reported in a financial daily, according to IMS Health, going forward, the Indian CRAMS industry is expected to grow by 18-20% per annum.

The recent regulatory actions come from different agencies. So the hope is these are isolated instances and do not become the norm for this group that has for so long been able to stay off the regulators' bad list.

Having said that, if such a trend continues, the growth of the CRAMS companies may not only slow down for a temporary period, but could have long lasting impact. This is because such events impact the company's reputation and consequently their business. Given their growth is dependent on other MNC pharma companies, such issues certainly affect future business opportunities. Much more if the issues raised at their plants are more severe.