Cipla gets 8% revenue from Indore plant. Can FDA warning lead to import hurdles?

Prolonged remedial work on the warnings issued may put Cipla’s FY26E earnings per share at risk, Jefferies has warned

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Cipla’s investors are on tenterhooks following US Food and Drug Administration’s (FDA’s) warning letter for the pharmaceutical company’s Indore plant.

The stock tanked 8 percent on November 23 after the details of the letter, which underlined data integrity issues at the facility, embedded with product complaints and microbial contamination, emerged. It narrowed losses the next day but was still down 6 percent and ended the week over 4 percent lower.

The market is closed on November 27 on account of Guru Nanak Jayanti.

Can this warning letter now escalate into an import alert? An import alert takes several years to resolve.

According to foreign broking firm Jefferies, the probability of an import alert is low since the warning letter is a continuation of observations received in Form 483 on February 17, 2023 and the classification of the unit as Official Action Indicated (“OAI”) on August 5.

“The plant has been under OAI for several months and the WL (warning letter) does not change the status of the plant,” Jefferies’ analysts said. However, prolonged remedial work on the warnings issued may put FY26E earnings per share (EPS) at risk.

“We estimate the Indore plant contributes around 30 percent to Cipla’s US sales and 8 percent to overall sales with Albuterol being the largest contributor. While we assign a low probability of an import alert, the remedial work could be prolonged,” it said in a November 26 report.

Albuterol is used to prevent and treat wheezing, breathing difficulty and coughing caused by asthma and chronic obstructive pulmonary disease.

Also Read: Cipla shares show some recovery, gain 1% after HSBC maintains ‘buy’ tag

What’s the issue? 

On November 17, Cipla was issued a warning letter by the FDA for its plant in Pithampur, Indore, highlighting issues regarding Albuterol inhaler manufacturing, contamination incidents, document disposals procedures and repeat observations at multiple sites.

As per Jefferies’s analysts, the first two issues were regarding manufacturing processes, while the third issue was related to data integrity.

The brokerage said that it analysis found that 47 percent of import alerts are due to data integrity issues (manipulating data/overwriting or falsifying data), 37 from product and quality issues, 10 from hiding information from the regulator and 7 percent was due to repeat observations.

Also Read: Will Cipla shares scale greater heights if PE players buy stakes?

“While we assign a low probability to an import alert currently, we expect the remedial work to be prolonged and unless key products are site transferred in a timely manner (Cipla has spoken about dual site filings to de-risk operations), there could be downside risk to FY26E EPS,” it added.

Investors should monitor data closely for loss of market share in key products and news of site transfers.

Jefferies has maintained its “hold” call on the stock with a target price of Rs 1,230. The stock closed at Rs 1,196 on the National Stock Exchange, up 2.19 percent from the previous week.

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