Regulatory issues put IPCA earnings at risk

The problems at IPCA Laboratories don’t seem to end. The Food and Drug Administration (FDA) in the US has restricted its three plants — Ratlam and Pithampur in Madhya Pradesh and Piparia in Silvassa — from supplying drugs to that country till they comply with its guidelines on good manufacturing practice. The facilities had been under an FDA ‘import alert’ since early 2015 and the Street was anticipating some resolution on these issues.

The new action by the US regulator saw the stock lose a little more than eight per cent, to close at ~470.70, on Friday.

Analysts at JM Financial say the FDA action could be attributed to routine withdrawal of exemptions on products given earlier or the regulator not being pleased with the remediation progress made after its discussion with IPCA this April.

Though, currently, the US does not contribute much to sales, the new action would be detrimental to future earnings prospects. The US revenue contribution had continued to decline, to as low as 1.5-2 per cent in FY17, say analysts. They had not been anticipating much uptick in FY18, too, but were factoring some respite in FY19. With this action, hopes of an early resolution to IPCA’s regulatory issues have vanished.

JM Financial analysts say the return of the plants to regulatory compliance could be delayed into FY19. This would result in a worst case 10-12 per cent downside risk on their FY19 earning estimate, on account of weaker recovery in US sales, additional remediation costs and the consequent delay in margin recovery.

With FDA action, the risks to institutional sales, expected to start in FY19, have also increased. Anti-malarial drug supplies by IPCA that had stopped about a year before were being expected to revive. The company had recently been invited by The Global Fund to participate in the threeyear tender contract to be awarded in September for supply of anti-malarial drugs. This could have contributed well to FY19 earnings but is at risk with the FDA action.

While this is a major negative for the company, analysts have been cautious about the stock. PhillipCapital analysts had, after the March quarter results, said that a delay in plant clearance would have an adverse impact on IPCA’s generics US and institutional business in the near future. And, that earnings are expected to remain under pressure. They retain their ‘neutral’ rating on the share, with a target price of ~480.