Ipca Labs: Under pressure after US FDA import alert on Ratlam plant

Negatives seem to be priced in but a new adverse regulatory action could lead to further downsides

The Ipca Laboratories stock fell 8.6 per cent on Friday, after the US Food & Drug Administration (FDA) issued an import alert on its plant in Ratlam, Madhya Pradesh. The US regulatory body, which had in July 2014 issued inspection observations (Form 483), has elevated the action to an import alert. The company had at that time temporarily suspended its Active Pharmaceutical Ingredient (API) shipments from this facility to the US market. Given the acute shortage in the US, the FDA, however, has exempted four APIs from the import ban.

While the ban is a negative, analysts say the company could partly resume supplies due to the exemption of the four APIs, which account for 85 per cent of the US business. More, the US market accounted for a little less than 10 per cent of Ipca's overall revenue in 2013-14.

Analysts at Motilal Oswal Securities say Ipca would be able to recoup most of the existing US sales ($34 million in 2013-14) by 2016-17, with sharp price hikes in anti-malarial and anti-inflammatory drug, Hydroxychloroquine. The market size of this drug has increased to about $120 million from $30 million in 2013-14, on the back of price hikes by the competition.

However, what will be impacted are new launches, including 26 pending Abbreviated New Drug Applications (ANDAs), as these depend on the progress or resolution of the import alert,  expected to take about two years. The company has indicated it will try to resolve the issue at the earliest.

Analysts at Morgan Stanley, however, say the remediation cost at Ratlam could rise and there could be a risk of collateral damage to its API business in non-US markets as well. The stock could be under pressure if other regulatory bodies like the UK’s Medicines and Healthcare Products Regulatory Agency (MHRA) and the World Health Organization (WHO) also issue adverse reports on the plant. The plant in the Indore special economic zone also has Form 483 issued against it and there could be further problems if that is escalated.

However, the consensus view is that the negatives are priced in. The stock is down about 28 per cent since July 2014, when the company first received Form 483, and is trading below its five-year average. After a sharp correction and earning revision, analysts are assigning a lower price-to-earnings (P-E) multiple of 14 times (against 16 times earlier). This P-E is lower than its historic five-year forward valuations and about a 30 per cent discount to mid-cap peers. Motilal Oswal Securities analysts believe this is unjustified, given robust branded formulations (47 per cent of sales), healthy return ratios, with a return-on-capital-employed of 21 per cent, strong earnings outlook, as well as low leverage (debt-to-equity of 0.2 times).

After July, analysts had lowered their consensus earning estimate (according to Bloomberg) for 2014-15 to Rs 34 a share; in 2013-14, its earnings per share was Rs 40.4. Their latest estimates suggest Ipca's earnings per share will grow to Rs 41.70 in 2015-16 and further to Rs 50 in 2016-17. The consensus target price of the stock, according to analysts polled by Bloomberg since Friday, is Rs 715.4, compared with the current price of Rs 640.