Shilpa Medicare -Racing away on the Oncology API highway!

Just some musings to get to EPS of 18.5 (as per certain research reports)-at current rate of EPS , its is a tall target
The CRAMS which was in standalone had a turnover of 220 cr of which 100 cr would be transferred to Raichem by end FY18 As the capacity stabilization is happening the loss on consolidated on account of CRAMs is around 4.89 cr as on H1 2018. This may end flat for FY2018
Plan A: With Jadcherla , they ramp up azac. & capac. but one has to note that the prices of these drugs have been sliding since 2012 & are at all time lows. So even if they do well on the above ,it may not move the needle much (again low probability to move the EPS)
Plan B: They move 100 cr CRAMS to Raichem (as per their plan) & get the batches stabilised & meanwhile get Japan approval (tranexamic acid production from new plant along with ursodeoxy.) , which will utilise the Raichem capacity & could add around 15 cr to NP as opposed to flat to slight negative (as anticipated by FY2018 end-based on 50 pct profit sharing)
Plan C: With Jadcherla approval , more ANDA`s get approved leading to increase in sales in US (again a decent probability event). Also increased sales for Onco in Europe is another high probability event
Plan D: Growth in non Onco products like oral strips / opthalmic -driven by capacity available post shift of CRAMS to Raichem (like Acebrophylline / Ambroxol etc.-not sure of how probable this is )

Also Dec quarter based on seasonality is a lot lower than Sep unless either of above plan materializes

Assuming that I have funds I will add to position around 575 or on a break 700. At current , just hold on to my existing

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Shilpa got some observations from USFDA , declared after market hours

http://www.bseindia.com/xml-data/corpfiling/AttachLive/0a2d093c-f768-40d8-9b5e-70640edceab2.pdf

a) Total 10 observations were cited during the close up meeting.
b) 7 observations are improvement in procedures and practices.
c) 3 observations are related to setting of analytical specifications, test procedures
and method validation.

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Came across this video on CAR-T which can cure cancer naturally… this info was mentioned earlier in the forum as well

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Update by Motilal Oswal…

The Form 483 resolution may take 3-6 months.

  • The USFDA, at its inspection held from 20-30th November 2017, issued 10 observations for the company’s Jadcherla facility. This is the fourth USFDA inspection at this facility over the past three years.
  • One observation highlights the need for (i) thorough investigation of complaints and out of specification (OOS) laboratory results and (ii) strengthening of procedures. In our view, resolution of this issue would not take more than three months. The USDFA appears to have made its norms stricter for OOS (it has been part of 483s for many companies of late), and thus, SPLA needs to be more vigilant about OOS-related compliance.
  • Another observation highlights the gaps in performing activities during filling which might lead to microbial contamination of drug, which again necessitates strengthening of procedures. As Jadcherla is a sterile facility, resolution of this issue is critical, which could take at least three months, in our view.
  • One of the observations highlights that the written stability program does not include reliable, meaningful and specific test methods. This indicates the need for review of the acceptance criteria for stability indicating parameters. In some cases, the company may have to re-look at the methods from the reliability perspective. Resolution of this issue may take at least three months.
  • Furthermore, the USFDA, in one of its observations, highlighted the need for a change in software or existing software to provide permit to single processing method. Resolution of this issue may take 1-3 months.
  • Another observation highlighted the need for review of acceptance criteria for sampling/testing, as they are not adequate to assure that drug products meet appropriate specification. Resolution of this issue may take three months.
  • Another observation indicates that company may have to provide scientific and statistical rational for sample sizes, or change the method as mentioned in pharmacopeia and reconfirm their test results. This may take 3-6 months.

Either product approvals or the receipt of EIR for this facility will be an indication of successful USFDA compliance.

Source: http://www.motilaloswal.com/site/rreports/636486652839713943.pdf

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Saw this article today, thought of sharing with you -

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Recent FDA inspection report findings has 10 observations … not sure of the implications… can anyone let us know how big is this finding?

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http://www.bseindia.com/xml-data/corpfiling/AttachLive/184a8de0-02fd-4e6b-b5da-d465c7bf46fa.pdf

It seems the firm’s quality concept is outdated. Cleaning, stability testing, documentation and validation are very basic parameters. They are not taking compliants and OOS(out of specifications) in a serious manner. They are trying to close the issue without investigation. The problems seems to be a tip of the iceberg; unless the management takes quality in a much more serious way, more complex product issues will show up in the future.

https://www.linkedin.com/pulse/20140909170947-22013644-oos-and-oot-result-how-to-handle-them
Also look up USFDA notes on OoS
I dont feel what you have written is a fair statement-specially quality being outdated. You have to understand that around Sep 17, they got their Jadcherla EIR from USFDA which has now again pushed backward by the 10 observations. Of late USFDA has focussed a lot on OoS , which has led to such a situation. My belief is that it would take around end Mar or end Apr to sort it out. Meanwhile if Shilpa gets ANDA approvals for Jadcherla , its acknowledged that CAPA they submitted was good enough-so triggers are EIR or ANDA approvals for JAdcherla.
Discl : Invested
PS: Many Indian companies have gone through pain on OoS front & Shilpa is no exception. One thing that I do agree is that management should not have let a Sep EIR to turn into 483 over the next few months , unless USFDA re inspected in the prospect of ANDA approvals. Also we need to highlight that API 1 & 2 had only 3 observations , which is a huge positive.

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What is the expectation on the 483s getting cleared on API & Formulation plants?

My take is as follows CAPA is good enough for API (considering the nature of observations posted by USFDA ) & could get EIR by end Mar. For formulations , the process could probably take atleast till Mar end & hence a possibility of EIR is more skewed towards May/June. Meanwhile if they get ANDA approvals for formulations in Mar, then it would be safe to assume that CAPA submitted for Jadcherla has been accepted by USFDA

Please verify the below news-this is what I read (for API USFDA observation)
From a news source on Shilpa medicare
Inspection concluded Jan. 19, according to Form 483 posted on FDA’s website.

Equipment and utensils are not cleaned and maintained to prevent contamination that would alter the safety, identity, strength, quality or purity of the Intermediates and APIs manufactured
Environmental monitoring plan is not clearly defined
Extractable and leachable studies for bags used in packaging have not been completed

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Let me first give my view on the observation noticed and I’ll explain why I feel the quality is outdated.

Observation 1: it says that the product would fail for with respect to the content of impurity if the product during production is stored at particular temperature for more than a particular time during production. A company manufacturing a product for a highly regulated market should be aware at what temperature the product, whether drug or intermediate is stable and for how may hours.

Observation 2: they have a contradiction in the self life and release specification. (Self life: how long the product is stable and fit for use both in respect to content of drug and impurity; specification: the condition based on which the batch of drug is released). It seems the specification for release of a drug is less than the self life of the drug. Also the impurity content is not mentioned in the release parameters for certain drug. (Content of impurities should be less than a particular value for drugs: plays a major role in safety).

Observation 3: cleaning plays a vital role in the manufacturing of drugs, particularly potent and cytotoxic drugs. The observation mentions either the cleaning is not properly performed or its not properly documented. Documentation is a very basic element, not only in pharma but also in any basic science.

Observation 4: it talks about REPETITIVE complaints and the failure to identify its root cause. So the mistake will occur in the future too. They have not considered the out of specification results. Again something very basic. If we get a mistake, all we have to ask is: why it occurs and what I have to do to avoid it.

Observation 5: it talks about the lacuna in sterile operations, right from the unwanted persons during media fill, to the maintenance of sterile conditions during filling. Sterility of injection is very important particularly in immunocompromised patients.

Observation 6: the stability studies were not performed correctly to monitor all the impurities. (Observation 1 may be the result of this).

Observation 7: it talks about the the permission given to the analyst to change the criteria for the quantification of impurities. E.g. the system will not detect the impurity below a certain quantity, certain time etc. (related to observation 1 and 6),

Observation 8: it mentions that the testing and release criteria of the final product is not reliable.

Observation 9: it says that the sample size is not statistically acceptable.

Observation 10: the training for visual inspectors is not adequate.

The Pharma production is moving towards parametric release i.e. the quality of the drug will not fail so that the final testing is not necessary (because each and every stage of the production is controlled) - The exact meaning for quality assurance (quality is assured).

These 10 observations mentions that they are still struggling with the very basic elements of recording the data itself. Also they are not concentrating on impurities (during stability study itself), cleaning (may be they have cleaned, but only record speaks), investigation of complaints (oos), etc. - all these are very elemental.

On the brighter side there were no data integrity issues. So they can correct the issues through CAPA and revamp their quality mindset - it would be better for the company in the long run.

Disc: not invested.

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I am sure most of the forum members may have analysed the results
The numbers were not great but some positives that I see
-Cost of materials consumed have come down substantially-the only explanation that I can think of is that with start of formulations unit-high margin products might be getting rolled out.
-The JV loss has decreased substantially compared to last few quarter-I feel that some stability is coming through -also CEO had indicated (read in a research report) that they would try and achieve a zero bottomline on JV from current YTD negative
Looks like Q4 is going to be critical in the light of USFDA 483’s-lets see
Disc: Invested

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Industry headwind… Fire in plant… Form 483 for formulation plant… Form 483 for API plant… Now RM cost increase… And one-off equipment/plant specific issue… Shilpa is passing through tough times currently…

Doing business is not easy… Investing in business is not easy either (Mr Adhia listening?)…

Updates from Motilal Oswal (post Q3Fy18 results) -

One-offs led weak results; Outlook remains promising

  • Plant specific issue dragged overall sales growth: Lower US sales on account of equipment specific issues and lower production of products for US market due to multiple inspections. In addition, it received lower development income for the quarter as it has started its own filing. Onco-API growth momentum was maintained for the quarter.
  • Higher RM cost and employee cost adversely impacts margins: Hike in RM prices in CRAMS led gross margin to fall. Addition of employees in formulation led higher employee cost. This resulted in lower EBITDA margin. Subdued operational performance led reduction in PAT.
  • US sales stable; yet to see considerable pick-up: SLPA continued to gain market share in g-Vidaza. SLPA has filed 33 ANDAs on cumulative basis with only 2 approved till date.

Source: http://www.motilaloswal.com/site/rreports/636541958428530929.pdf

Disc: Invested. Have reduced holding. No transaction in last 3 months…

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Brilliant…

TA associates needs to step up here and start accumulating

@spatel Is your partial exit due to high valuation or structural change in the business if any ?

Dear Sandeep

In the standalone financials -if you look at Dec16 Cost of materials consumed is almost half of Gross revenues whereas in Dec 17 it is down to 1/4th clearly pointing to formulations margin coming through. If this trend continues and assuming the CRAMS (raichem) stabilises , we should see a substantial pick up in margins. Would that read as a fair assessment?

regards

Blockquote[quote=“Vijayk, post:510, topic:210”]
Why is the stock trading at 50 pe. PE contraction happening in the pharma sector overall. Shilpa may follow them!

[/quote]

Finally, stock making 52 wk lows. Have been intrigued By stock trading at 50 pe.
Had raised concern on stock valuations many times in this thread.
Still very expensive!

Industry headwind, relatively rich valuation and shift of current bread & butter (i.e. Ursodeoxycholic acid intermediate) business to Raichem JV when the US sales was yet to see pickup were primary reasons behind partial exit some 3 months ago.

I think Shilpa’s technical capabilities have been rock solid. 33 onco ANDAs with backward integrated own onco APIs and non-infringing process patents speak volume for itself. That said, sales and marketing capabilities are relatively unproven currently.

Kudos to the management for being ahead of competition in Onco. Let’s recall what Shilpa has achieved. Shilpa built large Onco facilities. Brought them on stream. Produced exhibit batches. Filed 33 ANDAs. Got EIR for formulation plant. Received 2 ANDA approvals. Competition will take ~4 years to reach this stage if they start today. Few competitors have started in last 1 or 1.5 year. Shilpa still enjoys head start of 2.5 to 3 years. It is time to convert this time gap advantage into $$$$ soon.

Promoter has been visionary. Business structure has very high probability of exhibiting disproportionate growth. Just not sure on the when part. Clock is ticking. Every elapsed day counts.

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