Concerns aggravate for Ipca Labs

The Global Fund's decision not to source anti-malarial drug from the firm could impact its earnings 10-12%

In a major setback for Ipca Laboratories, Geneva-based The Global Fund has refused to source anti-malarial drug from the company. The decision was taken in the backdrop of Ipca’s Ratlam (Madhya Pradesh), SEZ Indore (Pithampur) and Piparia (Silvassa) manufacturing units receiving a warning letter from the US Food and Drug Administration (FDA) in January. These plants have been under FDA scrutiny since July 2014 and the company has voluntarily stopped supplies to the US.

There were expectations that the anti-malaria drug supplies to The Global Fund will resume in FY17. Analysts say the World Health Organization has cleared the company’s Ratlam facility.

In this backdrop, the Ipca’s filings to exchanges informing of The Global Fund’s decision came as a surprise. For investors and analysts, too, this is a big disappointment. After factoring in a price reduction, analysts had been anticipating a recovery in the company’s sales in FY17 from resumption of supplies to The Global Fund.

Rahul Sharma at Karvy Stock Broking had said last month that The Global Fund anti-malarial opportunity had reduced from $400 million due to a 50 per cent price cut coupled with a 10 per cent reduction in quantity. However, Sharma was expecting the Fund’s orders, which were postponed, to be awarded now.

Ashish Thavkar at Antique Stock Broking was factoring in Rs 200 crore sales in FY17, but now feels the same will now not resume till complete clearance of plants by the US FDA. A complete clearance is expected to take at least six months. With the supplies to the Geneva-based company not resuming, FY17 earnings for Ipca will be impacted by 10-12 per cent (earnings per share impact by Rs 2.2-2.8), estimates Thavkar. Ipca’s stock fell 10.6 per cent on the bourses to Rs 499.30 on Friday, following the company’s announcement.

Given the uncertainties over FDA’s clearance as well as supplies to The Global Fund, the stock is likely to remain under pressure. With other analysts, too, expected to lower their FY17 earnings estimates, there could be some de-rating for the stock.