Concerns aggravate for Cipla, Alkem

More worries for Alkem, as its Daman plant, which is under scanner, is crucial for US growth

Pressure over Indian pharma companies further aggravated with the US Food and Drug Administration (FDA) raising observations after its inspection of manufacturing facilities of Cipla and Alkem.  

However, Cipla clarified that inspections at its Goa facilities were carried out by the US FDA and three units have received four observations that are procedural in nature and the company has already responded. Consequently, its stock, which fell 7.5 per cent intra-day, recovered partially and closed 3.4 per cent lower at Rs 580.25 on Friday.

For Alkem, however, the concerns are more serious. Alkem, in a filing to exchanges, said its Daman facility has received 13 observations, and it shall put together a detailed response with adequate corrective and preventive measures to address the US FDA. The stock closed eight per cent lower at Rs 1,660.30 levels on Friday.

  The Daman plant contributes about 30 per cent to Alkem’s US sales but only six per cent to overall revenue. The market’s concerns are aggravated because Alkem was likely to get approval for launch of generics of multi-billion dollar cholesterol drug Crestor in the US by November. If these observations are not resolved in a timely manner, it could delay the launch.

Notably, Alkem had also achieved break-even in the US in FY16, and hence the Street had just started factoring in these gains. Analysts at IIFL had already warned that an adverse report on Daman could slow US approvals, as the facility accounts for 55 per cent of pending filings for new products.

But, not all analysts are worried majorly. Those at Motilal Oswal say going forward the US would act as a key catalyst, given about 50 pending ANDAs. A warning letter situation will impact their FY18 EPS estimates by six-eight per cent, though it is a low probability event for now.

For now, analysts haven’t cut their estimates for Alkem and are watching the progress on US FDA issues. One reason is that current US revenues are not significant from the Daman plant. Further, the company has a unit in Himachal Pradesh which had been cleared by FDA post inspections. So, as clarity emerges it will provide direction to the markets.

Meanwhile, Alkem’s vast portfolio for India market, in spite of issues like new drug pricing, has seen strong growth in the quarter. Strong secondary sales in July-August in the domestic market (75 per cent of revenues) suggest the September quarter could turn out to be another period of robust performance, said analysts at Motilal Oswal.

However, the same is priced in, reflecting in the sharp run-up in the Alkem stock price in the past three months. Consequently, further upsides seem capped and clarity on growth in the US holds key.