All Drug Recalls May Not Lead To Impact Revenues

Drug recalls are not new for the US pharma companies, but it is so for the Indian investors. Instances of drug recalls by Indian pharma companies from the US markets have increased in the last two years. Recently, Glenmark recalled its anti-Asthma drug called Montelukast Sodium tablets from the US markets in the strength of 10 mg on the complaints of off-odour. Though the company clarified that the drug recall will not impact its revenues, the market seemed panic as the stock was down by over 2% in the morning trade session.

Drug recalls can hit the revenues of the companies but one has to analyse recalls on a case to case basis as most times the recalls have not impacted revenues. US FDA has 3 types of recalls, Class I, II and III. Class I recall is issued in cases where there is a serious threat to the patient's health. One has to see what kind of recall the company has initiated. Class I recall may also cause some legal action against the company which may lead to a regulatory inquiry of the company's manufacturing facilities. On the other hand, if a company voluntarily recalls a drug, then one has to see how big the product size is and what is the market share of the company in that market.

With the Indian pharma companies trying to get a bigger pie of the US generic market, there could be a few slip-ups. Labelling and packaging issues are quite common and belong to the class III type. This may need a few batches to be recalled. In such cases, the impact on the company’s revenues is insignificant. The higher impact is however seen when companies do a nationwide drug recall of big products.

One such instance was Ranbaxy's recall of a generic of Lipitor. Though it was a voluntary recall, the company saw a significant decline in its revenues. It also had to make a provision for recall-related expenses which saw the company reporting losses for the December 2012 quarter. This is a perfect example of what would happen if one of the key products of the company is being recalled.

Dr Reddy's last year voluntarily recalled a single lot of Citalopram 40 mg tablets which was neutral on its revenues. Lupin also recalled (class III) 10,800 pouches of contraceptive drug in the USA in 2012 and one batch of Losartan Potassium Tablets in 2011. Both these events did not cause any material damage to its financial performance. Another pharma company Aurobindo pharma recalled one batch of Zolpidem of its anti-asthma drugs from the US markets in November 2012 which again did not cause any damage to its financials.

An analyst with a foreign brokerage house, on condition of anonymity, said that the drug recalls are quite common in USA. He also said that Glenmark's recent drug recall would not impact its revenues. Investors, on the other hand, can take such opportunities to buy the stocks of good pharma companies which get available at a lower price.