For Wockhardt, regulatory woes

Issues raised by US regulator will take time to resolve

A muted performance in the October-December quarter, coupled with uncertainties on resumption of full-fledged supplies to the US market, has led to further fall in Wockhardt’s stock price. The stock is down 34 per cent over the past month.

A key positive would be resolution of regulatory issues. However, the Street was worried about observations of the US Food and Drug Administration (USFDA) for the company’s Shendra plant. Although the unit does not supply to the US market, the issues raised by the USFDA, according to Citi analysts, are similar to the ones involving its other key units at Waluj and Chikalthana. The worry is that this might impact the remediation measures underway.

Among the few positives is the good manufacturing practices certificate issued by the UK drug regulator. The stock, according to analysts, remains a high-risk play with the resolution of USFDA issues at the key facilities being the main catalyst for a sustained re-rating.

The company’s December quarter was also not up to the Street’s expectations. Revenues were down 22 per cent over a year and operating profit was down 84 per cent. The results are, however, not strictly comparable due to one-offs in the year-ago quarter, as well as in the last quarter. While the year-ago numbers included a high margin contract, the research and development expenditure to sales has moved up to 14 per cent in the December quarter, from 8.9 per cent a year ago and 11.4 per cent in the September quarter. This, coupled with higher remediation expenditure, has impacted the operational performance. Even adjusted for one-offs, the performance has not been up to the mark, according to analysts.

While there are uncertainties related to supplies in the regulated markets (US) and slowdown in the European market, the company’s India operations are better off. Domestic operations are the single largest contributor to its revenues at 32 per cent, and grew 16 per cent over a year in the December quarter. This was on the back of 10 new launches and strong base business growth. The market-beating sales performance has continued, with growth for January at nearly 10 per cent higher than the year-ago period, while the pharmaceuticals sector grew at nine per cent.