)
After Ranbaxy and Wockhardt, IPCA Laboratories is now facing the heat from the US Food and Drug Administration (FDA).
After the negative FDA observations in July on its Ratlam API Unit, IPCA has recently seen negative observations on its Indore SEZ, too. In a note on Tuesday, Credit Suisse said two of the observations made by the USFDA in a Form 483 notice issued on the Indore SEZ are critical and similar to what resulted in adverse FDA action at Sun’s Karkhadi and Wockhardt’s Waluj unit. Hence, they downgraded IPCA’s stock to ‘Underperform’ from ‘Neutral’, with a target price of Rs 600. The stock lost 10.6 per cent on Wednesday to Rs 667.60. This has left the Street worried regarding the recovery of IPCA’s US sales (12 per cent of FY14 revenue) and possible impact on sales in other regions.
The company’s management is acting proactively and trying to resolve the matter faster and had stopped supplies to the US on their own. The company hopes to resolve the issue in six months. However, with the Indore SEZ getting critical observations, the Street now believes the timeline might get longer.
Credit Suisse believes the observations on Indore SEZ could delay the recovery of US sales. They say as the Canadian regulator issued import alert to Ratlam API (active pharmaceutical ingredients) unit in September, they expect an adverse action from the FDA as well. In case of import alert by the FDA on Indore SEZ, the company’s options of sourcing API from a third party to continue supplies of formulations to the US will also get jeopardised. The Ratlam unit supplied APIs to both Indore SEZ and Silvassa facility. Further, the Silvassa unit that had been inspected by FDA in July 2012 is also due for inspection. Thus, the analysts have cut their FY15/16 EPS estimates by 2/12 per cent to factor in possible delay in US sales recovery and feel that potential action of European regulators will be crucial (Europe contributed 18 per cent to IPCA’s FY14 revenues).
The company supplies formulations and APIs in the ratio of 61:39 and Indore’s contribution is estimated at Rs 100 crore of IPCA’s Rs 420 crore FY14 sales in the US, says Sarabjit Kour Nangra at Angel Broking. She is not as pessimistic as other analysts.
