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MOSL: HEALTHCARE-Issuance of Warning Letter gathers pace; Regulatory saga intensifies

HEALTHCARE: Issuance of Warning Letter gathers pace; Regulatory saga intensifies

Over the last 9-12 months, regulatory risk has intensified further for companies with exposure to the US generics business with the USFDA issuing a higher number of Warning Letters (WL) at manufacturing sites.

This is evident from the number of WLs issued by the USFDA in 1HFY20 (46), which is close to the total WLs issued in FY19 (63) globally. The OAI (official action indicated) classification in 1HFY20 is much lower compared to that in FY19.

While intention of top company management is to remain compliant, some observations have been repeatedly highlighted at different inspections, implying that the issues are systemic in nature and require a cultural change, which we believe will be gradual.

Despite escalation of classification/issuance of WLs, base business of companies is intact, which is comforting. However, there is significant delay in new approvals from sites under OAI/WL, which in turn is impacting growth.

While we believe that the US generics story is structurally intact and remains promising for revenue growth on the back of new launches, efforts toward complex generics should also support better profitability. However, regulatory headwinds are pressurizing near-term earnings trajectory. Given past experience, ongoing remediation measures as well as people training - in both manufacturing and quality control/quality assurance - should ensure that compliance related risk will gradually recede over the next 2-3 years as companies get consistent in successful inspections.