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Exclusive: We Reveal The Observations Made By US FDA’s Inspection Of Granules OmniChem's Vizag Facility


Exclusive: We Reveal The Observations Made By US FDA’s Inspection Of Granules OmniChem's Vizag Facility

True to our promise of keeping a tab on the regulatory inspections of Indian Pharmaceutical companies, we are happy to get our hands on the Form 483 issued for the first time inspection conducted for Granules OmniChem’s Vizag facility.
This is not a recommendation to buy or sell the stock. Analyst and family do own some of the positions listed here. Please assume we are biased.

Granules India – manufacturer of Active Pharmaceutical Ingredients (APIs), Pharmaceutical Formulation intermediates (PFIs) and Finished Dosages (FDs).
Exclusive: We Reveal The Observations Made By US FDA’s Inspection Of Granules OmniChem's Vizag Facility
Granules Vizag SEZ i.e. Granules OmniChem (50:50 JV with Ajinomoto OmniChem, a Belgium based Contract Manufacturing Organization entered in July 2011) which is a Multi-Product API Facility focused on complex APIs in therapeutic sectors including cardiovascular, CNS and oncology went through a US FDA inspection during the first week of December, 2016.
The company has confirmed that this was a first time inspection by the US FDA, its latest investor presentation confirms that this facility does not have regulatory approvals from any of the regulators including U.S. FDA, MCC, COFEPRIS, INFARMED, TGA, HALAL and others.
Exclusive: We Reveal The Observations Made By US FDA’s Inspection Of Granules OmniChem's Vizag Facility
This JV was formed with the purpose of providing a cost effective manufacturing base to innovators for their products when they go off patent – so that it helps Omnichem’s customers decelerate loss of market share for their brands.
The company is currently working on a portfolio of 4-5 products. For the growth of the JVs CRAMS business, it was essential that a US FDA approval be provided. This was because until the facility gets regulatory approvals the JV can produce API intermediates. Only post approvals will the JV be able to produce APIs for brand leaders and innovator companies in the world.
This is what Mr. Krishna Prasad Chigurupati – Chairman & Managing Director had mentioned in relation to the FDA inspection on the 25th October, 2016 –

FDA inspection for the CRAMS unit is expected shortly anytime. It should be within this year since some filings have been done by our customers which should be inspected. We will start supplying the main APIs rather than intermediaries if and when it happens. We may supply after the inspection happens as well, because again there will be validations and customers were to feel a little more comfortable. FDA approval is one of the things that will lead to manufacturing of APIs, but it will be not too long after that. Hopefully they should be sending some APIs out of this plant next year, which will again lead to increased margins.

Back to the US FDA inspection. While the inspection took place and concluded from the 5-9 December, 2016; the company did not disclose this fact until the 19th December. In its regulatory filing, Granules mentioned the fact that US FDA completed their first time inspection of the facility with 7 observations. Granules also clarified that Granules India accounts for only its own share of profit and losses from the JV (this was recorded as a profit of Rs.708.7 lakhs in Q1-2016 which was shown as profit from Associates.
Exclusive: We Reveal The Observations Made By US FDA’s Inspection Of Granules OmniChem's Vizag Facility
As per the Q1 earnings call, sales of Granules Omnichem stood at Rs. 83.9 crores; while the profit stood Rs. 7.9 crores. Granules hold 50% stake so Rs. 3.95 crores was its profit. Similar figures for Q2 as per the earning call were Rs. 8.2 crore in sales.
FY17 Guidance provided for the complete year is Rs. 180 crores to Rs. 200 crores by the end of March, 2017. Q1 stood at Rs. 80 crores with Q2 and Q3 expected to be slightly subdued and Q4 target of Rs. 90 crores plus.
Here is what Mr. Krishna Prasad Chigurupati – Chairman & Managing Director had to share on his expectation in terms of revenue from this JV:

Revenues, in crams business, some of these products have long cycles of manufacture. We have to follow the methods given by the innovator companies and these products take about four months to six months to complete and unless we complete them we cannot bill them, which is the reason. So the first quarter was very good and second quarter and third quarter will be subdued, fourth quarter again is going to be good, it is going to better than the first quarter.
Right now we are not making APIs, we are making intermediates for APIs and with our partner plant in Belgium, and they convert it to API. And the orders are, we see a very bright outlook, we see a better capacity utilization next year and also a possibility of making some of the APIs here which will again increase the margins. And will definitely increase revenues next year.

Here is the Form 483 issued by the US FDA team for the inspection conducted at Granules OmniChem in Visakhapatnam, Andhra Pradesh.
Exclusive: We Reveal The Observations Made By US FDA’s Inspection Of Granules OmniChem's Vizag Facility
First 4 observations are in relation to the quality maintained at the unit while the 5th and 6th observations were made in relation to the laboratory system with the last one on the material system handling.

Observation 1

The quality unit cannot ensure review of all deviation reported during production prior to final product batch release.
What spooked this observation? – 21 instances were noted wherein the production operator omitted or repeated the number of the forms used to report production deviations. No assurance was provided that these production deviation remarks were reviewed by the Quality Unit before releasing the batch.

Observation 2

Employee was not trained prior to conducting the cleaning of the Microbiology Laboratory ISO Class 8 room.
What spooked this observation? – The person was trained on the SOPs for Cleaning Procedure and Entry and Exit Procedures 5 days after he completed the cleaning of the Microbiology Laboratory.

Observation 3

Change Control System does not evaluation and reflect all changes that may affect the production of the finished products.
What spooked this observation? – Changes observed in the batches were not completely documented and evaluated before identifying the critical parameters of manufacturing instructions.

Observation 4

Production Master Batch Records are incomplete
What spooked this observation? – MBRs did not include the remarks noted on the 15-Dec-14. MRBs also did not include supervisor signatures in some instances.

Observation 5

Laboratory control records did not include complete data derived from all tests conducted to ensure compliance with established specification and standards, included examination and assays.
What spooked this observation? – Analytical records does not include documentation of the preparation of sample solutions, stability solutions, quantity of solution prepared, date of preparation and expiration date of the solution.

Observation 6

The facility design and maintenance increases the potential for contamination of your equipment and product.
What spooked this observation? – On a walk-through of the production area – the FDA inspection team noticed cracks in the walls with chipping of paint, water damage on the dry wall in various locations of the unit as well as ceiling gap between 2 unrelated rooms.

Observation 7

Material should be handled and stored in a manner to prevent degradation, contaminations and cross contamination.
What spooked this observation? – The labelled storage requirement for the sampled material stated “keep container cool and dry”. However, as per the log book of the storage area, there was no assurance of the ambient condition not adversely affecting the quality of the product.

Our understanding signifies Observations 1 and 6 as highly critical with Observation 4 as mildly critical with the remaining observations procedural related which can be fixed immediately with the help of professional consultants.
Even if Granules is able to take remediation steps for others observations, a re-inspection would be required so that the company can start making APIs so as to increase its current margins.
The stock is still trading below the close of 19-Dec-16 levels when the regulatory disclosure was submitted to the exchange.
Exclusive: We Reveal The Observations Made By US FDA’s Inspection Of Granules OmniChem's Vizag Facility


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