(KUNJ) #21

Although I am by no means a pharma expert, my two cents :

We all as investors sometime do get tempted to buy a particular stock (which we have tracked for quite sometime) after they fall 30 to 40% due to some temporary issue / setback . However, experience has taught me that most of the time it would be prudent to wait for the dust to settle and buy only when clarity emerges. So what if the stock rallies 10%-15%. Will that 10-15% upmove make any difference to our networth? Any one contemplating buying any pharma stock immediately after FDA /MHRA shock should study in detail about the impact of such action on the stock prices of IPCA Labs and Marksans Pharma. In case of IPCA labs initially even smart money did bought the fall (using similar logic in some of the previous posts) however, now the wait seems longer.

Further applying trailing P/E matrix in such case would be dangerous since that 15 odd P/E may become 30-40 P/E if the US sales come down (assuming margins are higher there).

However if some one has greater insights / conviction on the story or management and has a time horizon probably longer than most of us have, then its a different case all together because stock market returns are ultimately a function of one’s conviction

Disc: Above is a generalized reply and not stock specific since I don’t track the Company

(Bhaskar Jain) #22


In a note, HSBC said Unit II includes an export oriented unit, an SEZ unit and DSN SEZ unit which accounts for 20%,30%, and 30% respectively of Divi’sBSE -11.64 % total sales.

HSBC said the DSN SEZ unit was not part of the FDA inspection and assuming US accounts for 20% of total EOU and SEZ unit sales, about 10% of total company’s sales will be under threat if the Form 483 issues escalate to import alert.

(Bhaskar Jain) #23

I agree that it may take a while for this to play out… But am willing to hold this for long. We have to consider that a Divi’s customer may not have any other big USFDA certified vendor who can immediately start supplying APIs. Divi’s management is not very investor friendly and so we have not heard back from them but I am sure they must be working on remedial plans…

2007 AR says: The strategic size reached in some of the generic APIs has made Divi’s a supplier of choice for major customers including branded generic manufacturers which ensures business from these customers on a long term basis.

2011 AR says: Company undertakes campaign production of products by running the plant at full steam and stock these products for sale - thus freeing the multi-purpose plants for producing other products. As the company has a very large market share for some products, we do not forsee any problem with sale of the products. Slow moving and non-moving items have been fully provided for.

Site transfers for key products is also a possibility…

(amitsuee) #24

We have seen similar stories playing out with other pharma majors Sun, Lupin, DRL. Some have resolved and others seem confident of resolving the issues. Going by these experiences I think given enough time Divis will come out of it and should come out stronger unless the raised issues are not resolvable unlike other Form 483s which I think is unlikely. The fall may offer a good buying opportunity a pharma company with sub 20k cr market cap at decent valuations with sound fundamentals and a management with good track record until now.

Disc: Invested from 1100 levels, watching the slide painfully and looking to add more

(Bhaskar Jain) #25

Regarding IPCA Labs, I too invested after listening to the management concall. I think all of us were misled by the managament about the severity and time needed for the remedial plans to be accepted by USFDA. Management then had seemed confident of resolving the issues by the time they had promised. I had sent the following mail to them but did not receive a reply.

Dear sir,

I and my family members are shareholders of IPCA and we have been patiently holding our shares hoping for the US FDA issues to be resolved. The following are taken from my notes based on management interviews and earnings conference call.

  1. FDA issues warning letter on Ratlam on 18 july 2014. Data integrity issues. We voluntarily suspend operations and say issues will be fixed in 4-6 months.

  2. Sept 2014 : FDA gave 6 observations on Indore facility. Management says it has less gravity than Ratlam. Approaching US FDA in January.

  3. Feb 2015 - Management claims WHO, EU had inspection of Ratlam and is confident of resolving issues.

  4. Jan 2015 - Import alert on Ratlam

  5. March 2015 - Import alert on Indore and Piparia.

  6. IPCA concall regarding impact of USFDA import alert - Management expects all facilities to be USFDA compliant before Dec 2015 - company has installed new hardware

  7. June 2015 - Quarters time needed to address issues.

  8. August 2015 - Received WHO certificate

  9. December 2015 - Approached US FDA for inspection. Not sure when FDA will inspect and clearance given.

  10. April, 2016 - Global funds stop sourcing from IPCA

In the latest 2015-16 annual report you say:

The Company is in the process of implementing comprehensive remedial measures at all its manufacturing sites to ensure quality
and regulatory compliances. These remedial measures included review of all processes and procedures, revamping of training
system, recruitment of senior quality personnel as well as automation of quality control laboratories. Your Company is committed
in resolving the regulatory challenges faced at the earliest. The Company is also committed to its philosophy of highest quality in
manufacturing, operations, systems, integrity and cGMP culture. Your management is confident that implementation of remedial
measures will ensure that the Company will regain all its regulatory approvals in due course of time.

In last years 2014-15 annual report you said:

The Company is implementing comprehensive remedial measures at all its manufacturing sites to ensure quality and regulatory
compliances. These remedial measures included review of all processes and procedures, revamping of training system,
recruitment of senior quality personnel as well as automation of quality control laboratories. Your Company is committed in
resolving these issues at the earliest. The Company is also committed to its philosophy of highest quality in manufacturing,
operations, systems, integrity and cGMP culture. Your management is confident that implementation of remedial measures will
ensure that the Company will regain all its regulatory approvals.

So we are still in the “process” of resolution. What have been doing for the past years.

Based on the above timelines, it is clear that you were overconfident that we would resolve the issues and you have been painting a rosy picture to the shareholders all along. You seem to have taken FDA comments lightly.

(1) So my questions is as a shareholder how long should I wait to see all the FDA issues getting resolved? Seeing your peers like Lupin resolving their issues so fast puts a big question mark on IPCA’s management. We had hired a consultant also for this.

(2) What employee changes have been made? Since one of your employer told US FDA- “if we find a failure, we set back the date/time setting and re-integrate to achieve passing results.” Looks like there was a whistleblower who sent mail also.

(3) Promoter confidence on IPCA - It is high time promoter show confidence by increasing their stake in the company. It was said in a news report that promoters have bought into a unit of Gammon India. Why not IPCA. Diversification is not an excuse.


(Marathondreams) #26

I am still to hear any USFDA hit company management coming out to say “we messed it up and it will take 2+ years to resolve the issue”. They will always say “we are working on it and will resolve as soon as possible” Now it is upto the investors to decide what that “as soon as” means.

My experience with USFDA hit companies is in line with famous Warren Buffet quote “There is never single cockroach in the kitchen”. So issue rarely remains isolated to one plant, although it always starts with one plant/location.

About price, it is like catching falling knife! If you are upto it, go for it but keep your investment horizon of 3+ years at a minimum!

(Yogesh Sane) #27

No offence but I always find such thinking ironic. If one is willing to hold a stock for a long time why not wait for few more days/weeks to let the dust settle? For a long term investor, few weeks shouldn’t make much a difference.
Next set of news (broker downgrades, company commentary etc) is likely to be bad than good so there should be entry points ahead. The stock most likely is not going to rebound back above 1000 in next few days or weeks.

Please don’t take any offence but I used to make similar mistakes so just sharing my experience. For a company like Divi’s that hardly gave long term investors a chance to enter, such sell off appear to be overreaction (and it may as well be) but in most cases market is just pricing in future loss of revenue, profits and growth. With rest of the market in a correction mode, this company could fall off radar of long term investors for some time.

What’s surprising though is the company made an announcement on Dec 7 and stock sold off on Dec 23 without any additional news except for the broker report. This means many investors don’t do their own research and depend largely on broker research even for a well know mid-cap company.

(Bhaskar Jain) #28

No offence taken. Thanks for sharing your views.

I did not mean to imply that we should catch all falling knifes like TreeHouse etc. If a great company comes out with a setback which is fixable and may result in near term uncertainty and loss of revenue, institutions and herd mentality leads to people selling. We need to remember for each seller, there is also a buyer. My edge in this market is my time horizon. IGL is a classic example. When the PNGRB issue happened, stock fell off a cliff. If someone had studied the decision and done the analysis and bought then, he needed to hold for the next few years to see great returns. Same thing when Maruti had an issue with its labour union. I can go on and on but my style is contrarian long term investing in great companies. But some people can make great returns by identifying multibagger smallcaps. Everyone has their own style that is why we have a market. For me investing substantial amount of capitals in unknown smallcaps is a “risk” I am not willing to take.

(Bheeshma Sanghani) #29

As i understand from my cursory reading of this issue, Divis lab has not received any warning letter - just 5 observations. Some of them certainly appear to be serious to the extent that they are seriously worded. the us fda site which has some very recent letters posted online doesnt have the Divi letter anywhere. I am inclined to believe that these observations are routine in nature in the absence of any additional information except newspaper reports. Pharma companies in India exporting to the US will from time to time receive these observations and warnings from their main process auditor ( USFDA ), in fact I am sure that the USFDA auditors will have some observation targets to meet which will be linked to their incentives. More the observations more the incentives for auditors. We see this in every field where we have auditors. Even if the observations are very minor the way they are worded are serious - that way auditors can submit observations ( meaning they can show that they are doing their job ) and since the observations are minor the company can quickly rectify them. its a win win system IMHO

(Kranthi Kumar) #30

part of IndiaNivesh update on the company:

full report is here:

" After going through the contents of Form 483, we believe there are some
serious issues brought out by the USFDA, especially related to data integrity,
maintenance of computer records & facility maintenance (quality controls) etc. We
believe the issues raised by USFDA are serious in nature & can take a long time to
resolve (taking cues from experience on similar issues faced by other impacted Indian
Pharma companies).
We wish to highlight that the impacted facility at Vizag (Unit 2) accounts for 75% of the
company’s current total installed capacity. This facility contributed 70% to the total
revenue of the company in FY16 & US geography accounted for 32% of total revenues of
the company in FY16.Thus early resolution of FDA issues is critical for the company.

Is there a possibility of the Form 483 getting escalated to Import Alert:
Going by the observations noted by inspectors in Form483 & strong words used, it appears
that issues raised are quite serious. It is difficult to take a call at this time whether this FORM 483 can be escalated into Warning Letter/Import Alert but the risk of the same is quite high.
It will be clear only after a couple of months whether the company is successful in its
efforts or not. However, Divis Lab’s track record on regulatory compliances has been
exceptionally good in the past which may weigh in on USFDA’s decision on any harsh
step against the company.

Conclusion: From the aforesaid discussion, we can draw a clear inference, that stock
price is reflecting the worst scenario & major part of negative news is already in the
price. However, we expect the stock to languish around current levels as sentiment will
take precedence over valuation. Until any clarity emerge from USFDA side the stock may
remain underperformer. Although our target price is 25% above the CMP which qualifies
the stock to BUY but since the regulatory overhang will limit upside, we maintain HOLD
rating. We reduce our target price from Rs 1267 to Rs 1087. High risk takers/aggressive
investors may use this opportunity to buy also as down side risk may be limited but
upside will come only after clarity on resolution of issues which is at least a few quarters

(Yogesh Sane) #31

Agree. Yours is more of a special situations while mine is growth.

Coming back to Divi’s I am curious to know if you have any ballpark number in mind about how much it will cost Divi’s to get back in the good books of regulators? I know it’s too early to say but I am just looking for a rough estimate to see if there is any margin of safety at this price.
My rough estimates going by experiences of other companies is EPS of 30 for FY17 and 36-40 for FY18 depending how long they take to recover. At current price, it is selling at 20 times fy 18 EPS that’s little less than historical average but that’s just a reflection of increased risk. I could way off in my estimates though.

I am not trying to discredit your style, just learning from someone with a different style.

(Yogesh Sane) #32

Field inspectors issue observations which are reviewed by FDA officers along with response from the company. If they are not satisfied that company has taken corrective action to address the observations FDA issues a warning letter which take up to a year from issue of 483.

I don’t think it works this way in US.

A minor quality issue for us in India is serious issue in US. I know this is a general statement but that’s my personal experience. Just a difference of perspective.

(Bheeshma Sanghani) #33

@Yogesh_s Of course this is just my opinion. However, from my experience in auditing and handling auditors i have developed a view. Variable Interval reinforcement is a mental model and well researched in psychology. If you want someone to behave in a particular manner , from time to time but in an unpredictable manner, you need to reward them. But these rewards have to be unpredictable to be most effective. I think the USFDA understands this well ( and this is my view ) - from time to time they send these auditors over - they make these observations (which are wholly unpredictable) - then they issue these warning letters ( which border on threats more than a politely words). The entire objective of this exercise is to communicate to the company ( and to others in the same business) from time to time and in an unpredictable manner how important the FDA is to the basic survival of the company ( FDA approval is very critical ). And from time to time they will revoke the FDA approval for minor but seriously worded issues ( if they have made up their mind to do so) . All of this is done in a wholly unpredictable manner and it works fantastically well to maintain the overall level of quality in the pharma US export business. As Charlie Munger says - a little bit of unfairness towards an individual is necessary to maintain the overall level of fairness for the entire community. I think this is whats happening here!


It may be a minor issue or major, the company should have been fair in disclosing the actual content of the FDA observations in the first instance, without hiding the seriousness of the issue in pleasing words. This misinformation gave scope to some body else to profit from, at the cost of small investors.

Disclosure: Not invested

(csteja) #35

What's surprising though is the company made an announcement on Dec 7 and stock sold off on Dec 23 without any additional news except for the broker report. This means many investors don't do their own research and depend largely on broker research even for a well know mid-cap company.

This is one of the main reasons for such a nasty fall. If shareholders knew it on Dec 7, the stock would not have fallen so much. The news would have been priced in their minds.

(Kranthi Kumar) #36

Capital mind coverage on the whole 483 episode. Also the complete list of observations revealed.

Staring at over 30% loss so far. Haven’t made my mind on what to do next. This could be one of the costly lesson learned in terms of un predictable black swan events.

(Dhwanil Desai) #37

I have very limited understanding of the Divi’s business, however I thought it may be relevant to share my experience and some learning from similar situation in Ipca.

  • We all have heard it umpteen times that when a great business is passing through as rough patch, it is the best time to load up. However, what is often not spelt out is the time horizon required to make risk adjusted above average returns and the path that it traverses (volatility in prices) to make the return. I had severely underestimated both!:slight_smile:

  • As it has been pointed out, under such circumstances, management typically lean more on “hope” side and lay out possible consequences which are less severe than the worst case scenario…hence, it may be useful to do your own assessment of worst case scenario (i.e probability of warning letter/import alert) and AT LEAST do a scenario analysis to see how bad it can get in terms of numbers.

  • Thirdly and more importantly (and I have learnt it hard way), we focus on first order effects of the development i,e US business getting affected due to USFDA issue but fail to acknowledge the collateral damage this may cause. In case of Ipca, in addition to US business (which was factored in my worst case scenario), I never anticipated that other large part of their business (Global fund anti-malaria business) may also get affected as a fallout of this development. Had I factored in this or similar development in worst case scenario, my assessment of downside could have been completely different and hence my decision making too!

  • If the 483 observations alludes to systemic issues, (in case of Ipca QA lab data management was manual and as part of corrective action, they are automating the same across locations), there is a possibility that they may also face similar issues at other locations too. This again was a learning for me as more sites got added because all sites had same issues in QA lab. Now, this assessment will require understanding of the gravity of observations and possible consequences and hence someone having appropriate knowledge of the workings should be consulted

  • Once you are out of market for prolonged period of time (2-3 years) and have given up market share, it will take many years to gain the market share back. Ipca management has many times mentioned this in their conference calls that it may take many years before they reach near similar market share (or they may never reach). Impact of this is that one should not model 100% of the lost sales back in their model after resolution of USFDA issues. The process is gradual and they may not reach the same level again. In case of Divis, though they are not selling directly in market, once customers move to another CRAM player and if things work out fine, they may only partially move a part of production post resolution of USFDA issue or some of them may never move back. When we combine this with fact that no new ANDA will be taken up for review until the issues in warning letter (if it reaches that stage) are addressed and USFDA re inspections clear them, the normalcy in US business may come at much slower pace.

  • It is also important to factor in the sharp decline in margin due to negative operating leverage playing out. This infact is a double whammy and hence earning decline will be non-linear.

  • Last but not the least, I feel it is important to make an objective assessment whether the quality of business remains intact post development too! If not, we must assign different multiple to business then their historical averages.

Now to me this means, there are many assumptions to be made and many moving parts, making the situation very complex to assess. Hence, I feel, it may be prudent to wear a pessimist’s hat and work out worst case scenario based on above assumptions. If the price has dropped to a level where under worst case scenario too, the probability of losing money is low, then only one should enter.

Disclosure: I have burnt my fingers once in similar situation hence my views are likely to be negatively biased. Moreover, as I mentioned I have very limited understanding of the Divi’s business and hence some of the observations may not be relevant at all for Divi’s Lab. Thirdly, I have very limited technical understanding of pharma business so as to make sense out of complex regulatory issues. Hence, I strongly suggest that one should take my views with handful of salt:grinning:

(Kranthi Kumar) #38

Thanks dhwanil for sharing your valuable learnings.

(Kranthi Kumar) #39

Seems like the company submitted its response to FDA within the time permitted.



A Telugu TV channel compared the corporate governance at Divis with that of Satyam