Cadila to see marginal impact of USFDA warning letter
July 13th, 2011 // 1:11 pm @ jmpickett
Cadila Healthcare recently received a warning letter from the US Food and Drug Administration (USFDA) with regard to the company’s Gujarat plant. Cadila is said to have violated the current good manufacturing practice (CGMP) regulations for finished pharmaceuticals at its facility in Gujarat.
Chirag Talati, pharma analyst at Espirito Santo Securities tells CNBC-TV18 that since the company does not generate any sales from the facility, and approval of the 18 ANDAs (Abbreviated New Drug Application) were not expected until FY13, FY12 margins will remain intact. The warning letter could, however, have a marginal impact on the earnings per share of the company by 2% or less, he says. Also, it could result in the delay of about 6-9 months in terms of the approval for the injectible products of the company, Talati says.
Below is the verbatim transcript. Also watch the accompanying video
Q: Since currently no sales come from this very facility, would it have any impact in FY12 and FY13, more importantly, where you all factoring any kinds of sales from this facility?
A: Cadila does not generate any sales from this facility. The warning letter was triggered following a preapproval inspection that the FDA had for the injectibles facility. The company has filed 18 ANDAs for this facility for injectible products. We don’t think there was any approval expected in FY12, so no impact on FY12 numbers. In FY13, we would have expected couple of these to be launched in the US market, so to that extent there will be some impact on US sales. However, we don’t think it’s likely to have a material impact. Our sense is that the stock will probably have an EPS impact of less than 2%. We do see the warning letter resulting in a delay of close to 6-9 months in terms of the approvals for the injectible products for Cadila. So yes, there is a delay, we have spoken to other injectible manufacturers in the US who currently operate in the US market and the sense that we get is that some of the issues that were identified in the warning letter are more or less the normal operating issues that these companies face particularly with regards to microbiological contamination. However, the FDA has become very strict when it comes to these issues. So this warning letter comes as a negative surprise, but then we don’t really see it as being too material for Cadila.
Q: Do you think that Cadila can then stick to that USD 3 billion target of 2016 that is spoken about or 2015?
A: Firstly, I don’t think analyst would have factored in USD 3 billion in their estimates, we have not too. If you look at the numbers, we were seeing 18 ANDAs approvals coming in. Currently the sales for Cadila stand at a USD 1 billion and if you look at Hospira sales, for example, they stand at a USD 1 billion for the injectibles business as a whole for the US market. So to say that there will be a major downgrade on the USD 3 billion guidance just because of this warning letter, I think that’s an exaggeration. We don’t think this is likely to materially impact the company’s guidance going forward.
Q: In the past year or the first 6 months of this year, we have seen Aurobindo, DRL plus we have now seen Cadila getting warning letters from USFDA. Can you just give us an idea of what the USFDA strategy might be? It’s not that concerning for come companies that have corrected from the day’s lows such as Dr.Reddy’s and even Cadila Healthcare. It’s not that much of a sentiment negative, except for possibly Aurobindo. What is the diversion trend there?
A: There are a couple of issues that we need to understand over here. Firstly for Cadila it’s not material because there are no sales that come from it. So to that extent, their relationships with customers or wholesalers will not be impacted because their reliability in terms of supply is sort of not taking a knock off. For Aurobindo, yes it is an issue because Aurobindo’s complexity in terms of business has grown a lot. Five years back, it used to be one facility supplying SKUs in the US market. Now it’s gone up to be 400 SKUs from multiple facilities for Aurobindo. So yes, Aurobindo was always considered to be one of those companies which had an issue in terms of supplying drugs on a consistent basis to wholesalers in the US market. At the same time, Dr. Reddy’s, it has been able to recover in terms of it share price, as far as the Mexico unit is concerned. But let’s not forget that even its issue is at the Hyderabad facility back in 2010 that prompted a major sort of share loss for few of its products, which it has not really been able to recover. So globally, if you look at the FDAs stance, it has been getting tougher and stricter with regards to the quality procedures at overseas locations particularly. That is not restricted to Indian players only Teva, Hospira, Sandoz, everyone has been impacted by these warning letters. It’s just a part of the tightening up of regulations as far as the FDA is concerned.
