It's problems galore for Ipca Labs. The pharma company's Ratlam API unit received Form 483 and had data integrity issues almost a quarter ago. Back then, Arvind Bothra of Religare Capital Markets had downgraded the Ipca Labs stock. Recently, it received Form 483 from the US FDA for its Indore SEZ.
Bothra, however, doesn't see it translating into a similar action by European or other regulators because they have definitely different norms etc. Though from a stock sentiment perspective, it is a negative, he adds. Ipca was supplying to UK until the US approval came through. To that extent UK sales could be slightly impacted but Ipca has other facilities for European sales, according to Bothra.
"My assessment is that the stock price reaction more or less factors the worst case outcome. I do not foresee similar problems at the European regulators end and hence I think even after taking the US at zero sales for the next two years, earnings could still be looking at Rs 37-40 EPS for fiscal 2016 and 2017," he told CNBC-TV18.
Below is the verbatim transcript of Arvind Bothra's interview to CNBC-TV18’s Ekta Batra and Latha Venkatesh
Ekta: What is your assessment of Form 483 on the Indore SEZ and what sort of ramifications could it have for its other operations from other plants?
A: Actually at the time when Ratlam API unit received 483 and had data integrity issues, I had downgraded the stock because I thought that data integrity issues would not be taken lightly by the FDA. It has since been some time, almost a quarter and the subsequent inspection should have shown some improvement in terms of CGMP compliance. But Indore SEZ facility inspection again highlights that the company is still working on getting its act together which is a dampener to the management’s earlier guidance of six months timeline for resolution of issue.
So what it does is and I have maintained a stance that FDA could take an adverse action in the form of warning letter or import alert and impact their US sales for at least 18-24 months now that is roughly 8 percent of sales right now but was also one of the great drivers for the stock. So that comes down but more importantly there will be concerns on overall quality management system in the company. I do not think that this would translate into a similar action by European or other regulators because they have definitely different norms etc but of course from stock sentiment perspective it is a clear negative.
Latha: So what would be the impact because the imports are largely Europe and if you think that part is not in danger, is it only sentiment negative that you are worried about? If that then what is the target price?
A: Indore SEZ in particular has been dealing largely with US facilities. It was supplying to UK until the US approval came through. But to that extent UK sales could be slightly impacted but Ipca has other facilities for European sales.
My assessment is that the stock price reaction more or less factors the worst case outcome. I do not foresee similar problems at the European regulators end and hence I think even after taking the US at zero sales for the next two years, earnings could still be looking at Rs 37-40 EPS for fiscal 2016 and 2017. On that the valuations are not stretched, you are given a worst case scenario.
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