This post is about the long arm of the Food and Drug Administration (FDA) and the devastating impact that an FDA  warning letter can have on a public company’s equity, even over labeling. It stems from a recent article in The Wall Street Journal by Sudeep Jain entitled “A Chance to Buy Aurobindo Pharma.”  The crux of the news is simply this, as reported by the Journal: Aurobindo Pharma Monday said the FDA had asked it to submit a detailed action plan for the improvement of packaging and labeling compliance at its Unit III facility, near Hyderabad in southern India. More specifically, the article mentions that according to Citigroup …the case relates to three episodes of wrongful labeling of products manufactured at Unit III, reported between January 2010 and March 2011. The company has said it is in the process of submitting its plan on remedial action and has been given an opportunity to meet with the FDA.

Learning of this, investors in Aurobindo started dropping the stock like a hot potato. In a moment I’ll share with you what this meant to Aurobindo’s share value. But first, to clear up the headline on this article from the Journal, they aren’t implying someone could acquire the pharmaceutical company outright on the cheap. They’re saying now would be a good time for daring individual investors to buy shares because a labeling snafu should be easy to fix and the company will be back on track soon.  In fact, most labeling problems are easy to remedy in my opinion, which is why they shouldn’t happen in the first place, right? But from this story and others I have examined, it remains unclear exactly what kind of labeling problem drew the FDA’s attention. This much is clear: the problem has persisted for quite some time, has occurred often, and wasn’t fixed quickly and easily the first time or the second time.

Now to examine the effect of a warning letter of this type on a company’s market value. While I guess there’s good news for investors willing to assume the pharmaceutical maker will rebound this time, the news is less good for the company itself. From the news story comes this assessment: The news sent Aurobindo Pharma’s shares tumbling 9.2% to their lowest close in more than a month. The stock extended losses Tuesday, and in early afternoon trade it was down 4.9% at 167 rupees ($3.69). The 30-share benchmark Sensex was up 0.4%. If that doesn’t sound so bad, you should know that due to another FDA problem with another Aurobindo plant noted on February 23, the company’s stock has fallen 25% overall since then, according to the Journal. And then there is this fact that compares Aurobindo’s appeal versus other companies in its class: Going by estimated per-share earnings, Aurobindo Pharma is trading at a more than 50% discount to peers such as Glenmark Pharmaceuticals Ltd. and Dr. Reddy’s Laboratories Ltd., according to data from FactSet.

Cases such as this continue to astound me because 1.) they really shouldn’t happen; 2.) they are infinitely avoidable; and, 3.) given the economic impact of labeling non-compliance issues, the subject in my opinion should more often be on the radar of the most senior leadership people at these companies. At the best ones, it is, in fact, on the C-suite agenda. At the not so good ones, labels are often considered incidental to the operation and yet, you can see how non-incidental an FDA warning letter over labeling can be.

You can see The Wall Street Journal news report in full at this link.