Retail Investors Most At Risk From Drugmakers' Limited Disclosures On U.S. FDA Action

India's pharmaceutical companies continue to make limited disclosures on facility inspections, even as the market regulator has warned some of the companies. And it's retail investors that face the highest risk.

A host of drugmakers including Lupin Ltd., Cipla Ltd., Dr Reddy's Laboratories Ltd., and Biocon Ltd. made disclosures to exchanges since March after receiving observations from the U.S. Food and Drug Administration. But a majority of them did not disclose the details.

That even prompted the Securities and Exchange Board of India to seek explanation in some cases. Aurobindo Pharmaceuticals Ltd. was recently warned by the regulator.

Still, the nature of disclosures hasn't changed. Companies continue to divulge bare minimum information, leaving out the actual description of the observations. Most of them do not mention the impact this may have on the overall operations of the company as well.

Lack of full disclosures are seen as against the interest of retail investors.

Stock behaviour is very volatile around Form 483 issued on conclusion of an inspection and warning letters, Vishal Manchanda, a pharma analyst at Systematix, told BQ Prime.

"While certain institutional research houses may have access to the information ahead of others, it may not be fair to the retail investors that important public information is not available at the same time," Manchanda said.

The U.S. FDA conducts routine pre-approval drug inspections. The observations made by the FDA impact operations and new drug approvals as well as supplies of existing drugs from the facilities depending on their severity.

While some may require the company to voluntarily take action and correct the issues or observations identified, the others may lead to warning letters, barring fresh approvals. The FDA asks the company to take appropriate steps to correct issues and in some cases issue an import alert, preventing supply from the facility altogether.

While the severity may vary, the pharmaceutical companies not disclosing the nature of these observations prevent investors from assessing the potential risk that may arise.

"While FDA audits are an accepted risk for the investors, the Indian pharma industry should evolve some standards for disclosures so that the investors can appreciate the associated risks and impact to revenues and profitability," Shriram Subramanian, founder and managing director at InGovern Research Services, told BQ Prime.

"Companies should disclose more details on nature of observations by divulging non-competitive information," he said. "These detailed disclosures will allow investors to assess the risks to the companies."

Disclosing the Form 483 or warning letter on the exchange would help address the issue, Manchanda said. But its analysis on the impact on business would still be a "subjective issue since it would depend on individual assessment", he said.

Manchanda suggested that companies should "disclose the materiality of that plant or site—the revenue contribution from the facility to the overall business, pending filings from the facility that may get impacted".

"While analysts requesting this information from the company may get access to it, retail investors may suffer by not being able to gauge the materiality."

The market regulator had issued a warning in June to Aurobindo Pharma for not meeting its disclosure requirements by not providing full details relating to observations. The regulator had called it a non-compliance of SEBI (LODR) Regulations, 2015.

Exchanges are known to seek explanation from companies on their U.S. FDA audit when not satisfied with public disclosures.

Still, drugmakers continue to file limited details.

BQ Prime's emailed queries to top Indian drugmakers over disclosures remained unanswered.

While companies may not be clear about the implications and effects of the observations received by them due to constantly changing goalposts of U.S. FDA, it would be good corporate governance to publish the Form 483 warning letter stating the observations and issues on the exchange, Aditya Khemka, fund manager at InCred Healthcare Fund, told BQ Prime.

"The company could then state whether it believes the same to be material or not," he said. "For a matter that is so material to their operations, it must be disclosed publicly to protect the interests of the shareholders."