Wockhardt staring at a crisis?

Wockhardt Ltd might be headed for another crisis, as it has come under the scanner of the United States' health regulator.

Yesterday, the US Food and Drug Administration (FDA) issued an import alert on Wockhardt's manufacturing plant at Waluj, Aurangabad.

In a conference called today, Habil Khorakiwala, chairman, Wockhardt, clarified the losses in revenue from the import alert could be up to $100 million in annualised revenue and the company should be able to restore most of that within six to nine months, by shifting production to other plants.

The clarifications helped the stock recover from the early morning panic selling that drove it 18 per cent down, to settle at Rs 1,229.7, down just 6.5 per cent. In the past two days, the stock had tanked about 25 per cent on BSE.

The import alert on the Waluj facility has wiped out 38 per cent of shareholder value, even as its market capitalisation dipped to Rs 13,475 crore from a high of Rs 21,979 crore in March.

However, apart from the $100-million loss, Wockhardt's new generic drug launches in the US are likely to be hit. Of the 45-46 abbreviated new drug applications (ANDAs), pending at the FDA, half of these were filed from the Waluj facility. The overall market potential of the ANDAs are not known. "We have 45-47 pending ANDAs. Obviously, half of them have been filed from this facility, and the other half were filed from other facilities, so that is not affected at all," said Khorakiwala.

Ranjit Kapadia of Centrum Broking said there might be further delay in getting approval from FDA for other facilities. He said, "Though the sites are already approved, site transfers need additional approval, which may get delayed." ANDAs might take 24-36 months to get approval. In between, they can rectify the errors and we hope the developments might not affect the approvals, he added.

Khorakiwala made it clear that no drugs would be recalled from the US, after the FDA import alert. According to him, the production of 25 per cent of injectables and rest of solid formulations would be shifted to plants in Shendra and another in Aurangabad. The process could take six-nine months, but whether the company would have a smooth transition is unclear.

The company is expecting a two per cent fall in margin in FY14, due to the suspension of manufacturing at the Waluj plant. Company's major products, such as Toprol and Flonase, are not manufactured at Waluj. The collective value of business in injectable, about $25 million and about $75 million or so is in solid dosage form.

Analysts have slashed their earnings estimate for FY14 by about 25 per cent.

Macquarie estimates a new earnings per share of Rs 120 for FY14, while Citi slashed it to Rs 116. Analysts have also slashed their target prices significantly down. Macquarie has a new target price of Rs 1,680, down 37 per cent from the earlier Rs 2,700, while Citi slashed the target to Rs 1,620, down 35 per cent. From the current levels of Rs 1,229, the new targets are about 30 per cent.

Even then, analysts have dismissed any possibility of a re-rating till after the issues with the US FDA have been resolved. While it is still unclear how long these issues would take to resolve, the company is hopeful it could be solved early. But such issues in the past with companies like Aurobindo and Clarion had taken about three years to resolve.

Wockhardt has made among the most spectacular recoveries and had come into the good books of analysts and market watchers ever since it defaulted on its $110-million FCCB payments in 2009. It subsequently went to a debt restructuring program from which it has now come out after it paid all its debt. Wockhardt is now in the process of recovering its assets from some of the banks. The company's share price, just before the current episode, had risen 684 per cent since January 2012 when it hit an all-time high of Rs 2,166 on March 12.