Alkem Labs’ Daman Plant Gets 13 Observations From U.S. FDA; Stock Slumps

Alkem Laboratories Ltd. slumped after the company said its Daman plant received 13 observations from the U.S. Food and Drug Administration.

The U.S. regulator conducted an inspection at the Daman manufacturing facility over a ten-day period from September 20 to September 29, 2016, Alkem said in a filing to the exchanges. The company said it will submit its response to the regulator’s observations in the Form 483 inspection report shortly.

At this stage, these are just observations and it should not have any immediate impact on Alkem’s business, according to brokerage Motilal Oswal analyst Kumar Saurabh. Though the Daman facility contributed only about 6 percent of Alkem’s total revenue in financial year 2015-16, it accounted for 30 percent of the company’s U.S. revenue. Additionally, about 50 percent of the company’s pending abbreviated new drug applications have been filed from the Daman facility.

An escalation of the observations into a warning letter would impact Alkem’s financial year 2017-18 earnings per share estimates by 6-8 percent, Motilal Oswal warned, though it added it was a low probability event.

Here are some more highlights from the report:

• The approval for the cholesterol-treatment drug Crestor which is due from the Daman facility in early November should come through if observations are not critical in nature.
• Alkem has no other pending 483s across its other facilities.
• India business expected to remain the cash cow.

Motilal Oswal has downgrades the stock to ‘neutral’ from 'buy’ on the back of the recent run-up, coupled with U.S. FDA-related uncertainty. It has retained the price target of Rs 1,800 per share.