USFDA warning poses challenges for Cadila

Successful site transfers to other FDA-approved facilities and new product approvals are critical for growth

Brokerages have cut earnings estimates for Cadila Healthcare over the next two years by five to 15 per cent following the two US Food and Drug Administration (USFDA) warning letters for compliance-related issues at its Moraiya formulation plant and Zyfine active pharmaceutical ingredients (API) facility, both in Gujarat.

While the stock recovered about one per cent on Friday after falling nearly 15 per cent on Thursday, the Street will keep an eye for approvals of four key products. Toprol ((hypertension), Asacol HD, Nexium and Prevacid (gastro drugs) are key products and their launch is critical for the company to boost its revenues and profits going ahead. Asacol HD for example is important as estimates suggest $35-40 million revenues during the first 180 days of exclusivity and delay in launch can impact revenues. The company has applied for site transfer of these products from the Moraiya facility to its other facilities such as the one in Baddi and the special economic zone.

  The Moraiya plant is critical as it contributes 60 per cent of the company’s US revenues. The plant has been under FDA scanner for over a year now and the company has been trying to resolve the issues by appointing third-party consultants and improving standard operating procedures. While the remediation measures were going on, the Street was not expecting a warning letter for this facility and thus reacted negatively on Thursday.

Though the warning letter does not stop the company from exporting products as would have been the case if an import alert had been issued, the complete resolution of the Moraiya plant may take longer. The company will be submitting its response post which US FDA is expected to re-inspect the affected facilities.

In the existing basket, its anti-malarial product, hydroxychloroquine, has been driving the US sales in the recent past, with higher volumes and as well as price hikes (including other products) adding to the US revenues.

Thus, the company’s ability to get site transfers (from Moraiya) will be crucial for maintaining growth. The company’s other facilities such as the new SEZ formulations facility (oral oncology, oral solids) from which it has filed over forty applications has got regulatory clearance and is a positive.

Analysts such as Sarabjit Kour Nangra at Angel Broking say that post correction there could be a seven-eight per cent upside in the best case scenario and remains neutral for now.