Author: Ekta Batra

Alembic snug after latest plant inspections, but street remains cautious

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Alembic Pharmaceuticals’ active pharmaceutical ingredient (API) unit at Gujarat’s Panelav seem to be faring well when it comes to US Food and Drug Administration’s (USFDA) inspections.

The latest inspection of the two API units took place from April 16 to April 23, 2018.

The company has only two API units – one at Panelav and the other at Kharkhadi, also in Gujarat.

The routine inspection concluded successfully as the USFDA issued zero observations to the facilities. This was also the case in June 2016, when the same two units were cleared with zero observations.

Two successful back-to-back inspections (with zero observations) indicate a good compliance level of the plant.

Besides reflecting positively on compliance standards, these units are important for company business too.

While the company do not have an exact plant-wise break-up of the contribution, Panelav unit is the company’s largest API plant.

About 80% of the API capacity is captive – used for in-house production – and the rest is sold. The company also had nine drug master files filed in the first nine months of FY18.

The company’s oral solid unit in Panelav, which was inspected by the USFDA in 2016 and 2018, didn’t enjoy the same zero observations as the API plants.

The oral solids unit was earlier inspected in March 2016, and was issued four observations by the USFDA that were subsequently resolved.

In March 2018, the same facility was again inspected and was issued three observations. While the number of observations is few and there is nothing as serious as data integrity, the street is fearing escalation of the first observation.

This first observation highlights the company’s failure to take corrective and preventive actions on a high number of tests results that were out of specification or invalid. Cases in point: 94% in 2016, 91% in 2017 and 63% in January-March 2018.

While the company has a strong compliance history, the street is cautious, especially because out-of-specification observations are becoming common compliance issues faced by Indian companies.

The fear is an inadequate response or remediation can escalate observations to warning letters or more.

The stakes are even higher as the Panelav solid dosages plant is the only USFDA approved formulation facility (the US contributes 28% of total sales) of the company. Hence, a remediation would be even more critical.

In any case, the next approval will be closely watched due to fears that if the plant issues don’t escalate, it may just be that the pace of approvals (around 9 to 10 expected in FY19) could slow down in the near term.

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As the Fortis board prepares to evaluate bids, questions arise over its competency and conflict of interest

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The board of Fortis Healthcare will meet on Thursday, April 19, to evaluate three competing bids of its hospitals business.

One is a revised binding bid by Manipal Hospital Enterprises, backed by investment company TPG, which is 21% higher than the previous offer and values the business at Rs 155 a share. The second is an offer of Rs 1,250 crore (Rs 500 crore binding and Rs 750 crore non-binding) by Sunil Kant Munjal’s Hero Enterprise Investment Office and the Burman family of Dabur. The third is Malaysia’s IHH’s non-binding expression of interest, at up to Rs 160 a share.

The board’s decision will be eventually voted by minority shareholders. But the board has to decide what the minority shareholders will vote on and hence has a tough task at hand.

Deciding the Best 

They have to decide what is in the best of interest of all stakeholders –patients, employees, shareholders, now and for the future. Will a revised bid by Manipal-TPG at Rs 155 per share capture the best fit for the company? Or is the deal structure too complicated?

Or is the need of the hour an immediate infusion of Rs 500 crore by the Munjal–Burman combine despite the remaining Rs 750 crore being non-binding? And should IHH be considered, at all?

While the board will make its decision anyhow, it is pertinent to ask is if the board in its current state is best able to make this decision? And whether there is a corporate governance issue here?

Following are the hard truths:

Currently, the Fortis board comprises four people namely Brian Tempest, Harpal Singh, Lt. Gen. Tejinder Singh and Sabina Vaisoha.

Compare this to the eight board members listed in the company’s 2016-17 annual report. That means the board strength is currently only 50% of what was its full strength.

The reason the board is a shadow of its former self is due to six exits in the past six months. The departure of the founders, the Singh brothers under a cloud is well known, but there have also been four independent directors who stepped down – all citing personal reasons –  since November 2017.

• November 14, 2017: Shradha Suri Marwah steps down due to personal reasons.
• February 8, 2018: Malvinder Singh, executive chairman, steps down
• February 8, 2018: Shivinder Singh, non-executive chairman, steps down.
• March 8, 2018: Joji Sekhon Gill resigns due to personal reasons
• March 19, 2018: Preetinder Singh Joshi exits due to personal reasons.
• March 22, 2018: Pradeep Raniga steps down due to personal reasons
• In April 2017, two independent directors stepped down as well, citing personal reasons.
• April 12, 2017: Lynette Joy Hepburn Brown steps down due to personal reasons.
• April 12, 2017: Ravi Umesh Mehrotra resigns due to personal reasons.

Of the current board, Lt. Gen Tejinder Singh was named additional director only on February 12, 2018, while Sabina Vaisoha was appointed as recently as March 27, 2018.  The Manipal deal itself was announced on March 27, 2018.

In his report titled ‘Fortis: Questions on Board Competence’ JN Gupta, founder of SES, a shareholder advisory service, has raised his concerns over the board’s shrinkage. He said only three board members were there when the Manipal deal was decided. Of the three, Lt Gen. Tejinder Singh had spent only 40 days in the company.

Serious Concerns

Hence, only two were aware of company affairs due to their longer association, according to him. That means only 20% of the normal board strength took such a big decision on restructuring. Also the Manipal–TPG combine raised the offer higher by 21% – without any nudge from the board.

Lastly, the association of the board members with group companies raises questions of effective control. A simple Google search brings up associations of board members with Ranbaxy, Religare and SRL Diagnostics.

For example, Brian Tempest is the ex-CEO of Ranbaxy and board member of Religare Capital Markets and SRL Diangostics. Harpal Singh too was on the board of Religare, resigning only in January 2018, and is listed on the board of SRL Diagnostics. Likewise, Sabina Vaisoha was appointed on the Religare board in October 2017.

Lt Gen Tejinder Singh, one of the latest inductees, is also on the board of SRL Diagnostics.

Governance experts are not happy and they have questioned the sudden spate of exits from the board, the current board strength, associations of current board members with ex-promoters, competence of the board to get the best valuation, lack of experience for new board members in Fortis Hospital operations,  the pending probe on alleged fund diversion by the promoters as well as the audited numbers.

Investors and bidders too are aware of the situation. While most key stakeholders have not questioned the ability of the current board, they agree it should be strengthened. However, strengthening of the board according to them is not priority in light of the liquidity crunch the company is facing.

However, there are other options available to the board. For example, they could set up an independent panel that can evaluate the three deals or call a shareholders meet to vote on the best option of the three.

But that too could be fraught with challenges. It will be time consuming and shareholders might lack the expertise to evaluate complex bids.

So whatever the decision, the issue of the board remains. I will leave you with an excerpt from JN Gupta’s report, which sums up the current situation:

“In short, the question is, given past governance standards, SEBI probe and alleged diversion of funds, can a depleted board bind the company and enter into a deal envisaging major structural change? While legally the board may be competent and there may not be any infirmity with the decision, governance wise it certainly raises issues of prudence.”

Ekta Batra is an anchor and associate editor, research at CNBCTV18. She has been tracking pharma and healthcare for almost a decade.

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For Alkem, it is déjà vu at its Daman plant

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In September 2016, American drug regulator USFDA inspected one of pharma company Alkem’s most important plants located at Daman. The plant is critical to Alkem’s US operations, contributing 30% of the total US sales and nearly 50% of pending new drug filings.

After inspecting the plant for 9 days from September 20, the facility was issued 13 observations by the US drug authorities. This was a bolt from the blue for the company, whose regulatory track record was until then quite clean. The stock corrected about 10% after the news as the street became worried that the number of observations were big and severity of the observations were unknown.

But it turned out that the fear of those 13 observations was unfounded. In a development that is rare and positive, the company received an Establishment Inspection Report from the USFDA in December 2016 – within 3 months of the inspection.

Alkem said the corrective action plan it submitted to the USFDA was found acceptable and the inspection at Daman plant was closed. In other words, the facility would continue to receive fresh approvals. It was a huge relief for analysts and investors.

Repeat Action 

Cut to March 2018 and it was déjà vu. The Daman facility faced another round of inspection by the USFDA, within 18 months of the last.

The frequency of inspections is worrying analysts who believe it could be due to the facility being seen as riskier than the others.

The inspection this time too lasted a total of 9 days from March 19 and well, it was again issued 13 observations.

The stock this time corrected only 10% intraday as the fears resurfaced about the number of observations and their severity.

The Form 483, which is issued at the conclusion of an inspection, is public and it appears that the fresh 13 observations might meet a different and tougher fate than those in 2016. Off the 13 new observations, five repeat – which means issues from the last inspection still exist at the plant.

The 13 observations centre mainly on the lack of quality control system and processes and record keeping. Analysts say the inspection outcome is worrying because the language used is terse. For example, the first observation is a curt: “There is no quality control unit”.

The first observation also describes how the quality control department has deleted 2101 files since March 1, 2018 on their network. Overall, according to pharma experts, the issues raised point to inadequate systems to carry accurate tests out and poor data protection and reliability.

The Street Is Watching

The street is now in a wait-and-watch mode. The fear is these observations could take time to resolve, at the least hampering fresh approvals and US sales. Financial services company Credit Suisse says there is high probability of the observations escalating to a warning letter or in the worst case, an import alert.

But a ray of hope for investors is that Alkem is primarily an Indian play and hence more resilient to bad news from the US. It derives 73% of its total sales from India while the US contributes only around 20% of its total sales and 10% of profit.

Therefore, a problem with a US focused plant is not as grave for Alkem as it might be for some of its peers that have up to 30-40% exposure to the US.

That said, the company has been growing its US presence steadily with seven new drug approvals just in the third quarter of 2017-18. The worry is that the 13 fresh observations could be a spanner in the works.

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