No respite for Wockhardt in near term

Given the uncertainty analysts advise investors to stay away from the stock

The Wockhardt stock saw a sharp fall of nine per cent to close at Rs 808.30 on Monday in reaction to the US Food and Drug Administration (FDA) warning letter, issued to the company on Saturday. The warning letter is consequent to the earlier import alert for the company's injectible and orals unit at Waluj. While the company believes there would be a revenue loss of $100 million (Rs 600 crore) due to the import alert, analysts say the loss would be in the range of $100-135 million and it would take three-four quarters to sought it out.

Says Sriram Rathi, analyst at Anand Rathi Institutional Research, "The US is a key geography, contributing 53 per cent of Wockhardt's revenues and the issue could take a minimum of a year to get addressed."

Macquarie Research's Abhishek Singhal, who pegs the loss at $135 million, says half the pending 46 abbreviated new drug applications (ANDAs) are from the Waluj facility, of which 12 were filed recently. ANDAs indicate the future product pipeline.

While the impact is currently limited to the oral and injectible units at the Waluj plant, analysts say concerns will increase if the issue extends beyond the affected units. While there is no indication of this, the company is looking at alternative sites from which the affected drugs can be exported to the US market.

Unlike the UK MHRA import alert, where the company has the choice of exporting from alternative plants, the US FDA action means even if the company were to file for exports from other sites, the procedure could take a further six-eight months for approvals to be in place.

 

  However, analysts believe the US regulatory body has pulled up the company for not following the processes according to its standards and Wockhardt is not facing as serious a charge as Ranbaxy.

The next step for the company will be to rectify the issues pointed out and this could involve appointment of consultants and remedial action. However, if this drags on, it could impact revenues and margins over the next few quarters, on account of loss of sales as well as costs incurred to remedy the situation. According to analysts' estimates, Ranbaxy had spent close to $30 million a year on consultants as part of its remedial process, and the cost to Wockhardt will depend on FDA queries.

As mentioned, the UK MHRA had imposed an import alert on the same plant. While Macquarie analysts estimate the plant contributed Rs 54-72 crore in FY13 (£6-8 million), given alternative sites the loss of revenue from the UK regulatory action could be about Rs 16 crore.

Looking at the uncertainties and the timeline associated with the remedial procedures, most analysts advise that investors not bottom-fish even as valuations are attractive, given the 56 per cent fall since May 24. While analysts are likely to revisit their estimates, the target prices for the stock currently are upwards of Rs 1,400.