Analysts say drug maker will need another year to resolve issues
JUST as generic drug maker Wockhardt Ltd was beginning to find its feet after recovering from a debt crisis in 2012-13 that threatened the very existence of the company, it finds itself in the middle of another storm that is impacting the company financially and has shaken investor confidence.
Wockhardt is one of the several Indian generic drug makers that have been at the receiving end of adverse action by the US Food and Drugs Administration (USFDA), which has come down heavily on these companies on grounds of sub-standard manufacturing standards. For Wockhardt, in the March 2013 quarter, US sales accounted for 56% of its overall turnover.
The current downslide began when the USFDA put the company’s Waluj unit in Maharashtra on an import alert in May 2013. When the manufacturing unit of a drug maker is put on an import alert, products from this facility cannot enter the US. Wockhardt, which was once the fifth largest pharmaceutical company in India, has seen its revenues fall around 30% year-on-year over the last three quarters. The company’s net profit in each of the last three quarters (till September 30) has fallen around 90% year-on-year.
The headwinds faced by the company have been reflected in the level of institutional shareholding in the company, which has been steadily declining. In the quarter ended June 2013, institutional investors held around 13.62% in the company. As on September 30, their holding has come down to 8.27%.
At the time of receiving the import alert, Wockhardt’s Waluj unit was the second largest contributor to Wockhardt’s US sales—accounting for almost a quarter, according to analysts.
To make things worse, in June 2013, the USFDA and the UK Medicines and Healthcare Products Regulatory Agency (UK MHRA) conducted a joint investigation of the company’s Chikalthana unit, also located in Maharashtra. The facility received an import alert from the USFDA in November 2013. The UKMHRA also withdrew the good manufacturing practices certificate awarded to the Chikalthana facility and Kadaiya unit in Daman. This made Wockhardt the first Indian pharmaceutical company to invite the ire of both the US and the UK regulators.
The import alert on Chikalthana made a huge dent on the company’s profits as not only was the unit responsible for 30-35% of the company’s US revenues in March 2013—it also produced the company’s highest selling product, the high blood pressure medication Toprol XL. In early 2014, the USFDA identified problems in the company’s Morton Grove facility located in Illinois in United States. Morton Grove accounts for more than half of Wockhardt’s current US sales. The company is still completing remediation measures in its plants and analysts estimate that it will take another 12 months for the company to resolve all outstanding issues.
Though there have been reports that Wockhardt’s promoters, led by its chairman Habil Khorakiwala, are looking to sell the company, the management has denied this. Furthermore, sources say that there would be no company willing to buy a troubled asset without an indemnification clause—like the one signed by Ranbaxy’s erstwhile promoter Daiichi Sankyo when it sold the company to Sun Pharmaceutical Industries.
“Sun Pharma bought Ranbaxy from the Japanese parent, Daiichi Sankyo only because Daiichi was willing to shoulder the remediation measures required to restore Daiichi’s units,” Arun Kejriwal, director of Kejriwal Research and Investment Services (KRIS) said.
In the June quarter of FY14, Wockhardt’s net profit fell 14.5% year-on-year while sales declined 4.7%. In the four sequential quarters before the April-June 2014 period, profit had been tripling compared to the year-ago periods.
In a report issued after Wockhardt’s June quarter earnings, analysts at Anand Rathi Research said they did not expect any resolution of the issues raised by the USFDA as inspections had not taken place till that time. “Due to these import alerts, we do not expect any short-term trigger for the company…to revive its growth momentum. Hence, revenue growth and margins would be restrained,” Sriram Rathi, a pharmaceuticals sector analyst with Anand Rathi, wrote in an August 18 report.
The company has 75 generic drug applications pending approval with the USFDA, of which more than 40 filings list Chikalthana or Waluj as the place of manufacture of the product—which means the applications will not get regulatory nod until the import alert is lifted. It has now beefed up its most recent facility in Shendra, Maharashtra hoping to offset the loss volumes from the other plants. “We are expanding our oral tablets facility (in Shendra). I think that is progressing well. It is in project phase right now. In a year’s time or so, we would have that facility ready,” Murtaza Khorakiwala, Wockhardt’s managing director and Habil Khorakiwala’s son said during an earnings call held on May 27.
“As long as there are no further damages, I do not see why the company won’t be able to turn this around,” SP Tulsian, an independent stock market analyst said. “The management is making sincere efforts and it may take around a year to resolves these issues. Though the company’s financial results have been disappointing, it has no issues in meeting its working capital requirements, Tulsian pointed out.