Credit Suisse downgraded pharmaceutical major Ipca Labs to underperform from a neutral rating on the back of likely adverse US FDA action at the company’s Indore SEZ plant and Ratlam API.
The brokerage house is of the view that analysis of Form 483 for Indore SEZ suggest FDA observations are critical. This in turn may delay the company’s sales revival in the US, it adds. Additionally, Canadian regulator issued an import alert to Ratlam API unit in September, which may trigger adverse action from the USFDA.
Surajit Pal of Prabhudas Lilladher says expectation of Ipca’s US sales recovery is a dampener. He feels the pharma company’s US sales will take atleast 18 months to recover. Ipca’s Indore SEZ supplies are nil at the moment, he adds.
He fears that if USFDA issue is raised then UK MHRA too may act.
Below is the verbatim transcript of Surajit Pal's interview to CNBC-TV18's Latha Venkatesh and Sonia Shenoy
Latha: Can you detail for us whether the USFDA observations are going to have a P&L impact on Ipca Labs and if yes how much?
A: It is basically the hangover of what happened earlier in Ratlam facility as well as what could happen in Indore. USFDA has raised a new observation of their Indore plant which has come very recently. What it means is that the prospect of supplying formulation from Indore SEZ plant has definitely gone for a toss. So people are expecting that they might be addressing the Form 483 issues in Ratlam API facility and if they get their formulation plant approved first time then solving Ratlam facility will be definitely leading them to get their US business on track. So that expectation is definitely hampered because of this observation which is pretty serious in nature given the kind of observation on data manipulation.
Latha: What is Form 483?
A: Simply put in financial terms Form 483 means qualification of audit. So any FDA inspection is nothing but an audit. Now if anybody raised 483 means they are raising qualification of audit.
Sonia: Eventually if there is a delay in the recovery of the US sales, how much do you think it could impact earnings?
A: As far as Indore is concerned they supply zero, nothing. As far as API is concerned Ratlam that is always reflected in the price. The only fear is that with USFDA as and when any kind of issue is raised consecutively by USFDA both on API as well as formulation, I think generally that has been followed by European authorities. So that means 18 percent of the total Ipca sales and one of the biggest part of their exports so that will be impacted and that will be a deadly blow for the company.
Sonia: Based on this news flow would you scale down your earnings, your EPS or your target price and where does it stand at now?
A: I have no official recommendation for this but I believe that people will start reflecting on the European numbers because that is the nearest fear.
Latha: But they could rectify those qualifications can’t they or do you think it is inevitable that European exports will suffer?
A: Yes, Europe will suffer or not that we will come to know later but US it will take at least 18-24 months.
Sonia: There is an FDA inspection expected at the Silvassa facility as well. How big is that facility and how concerned would you be?
A: That is not as big as Ratlam, Ratlam is the biggest and then comes Silvassa. So it will be roughly around USD 50-60 million.
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