IPCA labs

Stock Opportunities Untested - but worth a good look
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About company

Fully integrated pharmaceutical company producing Branded and Generics Formulations, APIs and Intermediates

Ipca is a fully-integrated Indian pharmaceutical company manufacturing over 350 formulations and 80 APIs for various therapeutic segments. They are one of the world's largest manufacturers and suppliers of over a dozen APIs. These are produced right from the basic stage at manufacturing facilities endorsed by the world's most discerning drug regulatory authorities like US-FDA, UK-MHRA, EDQM-Europe, WHO-Geneva and many more. Ipca is a therapy leader in India for anti-malarials with a market-share of over 34% with a fast expanding presence in the international market as well. We also lead in DMARDs (Disease Modifying Anti-Rheumatic Drugs) treatment for rheumatoid arthritis. We have leading brands in 5 therapeutic areas, with 4 of our branded formulations being ranked among the Top-300 Indian brands by ORG-IMS.

Sales distribution

Europe 32%

Americas 20%

Asia 10%

Africa 27%

Australia 3%

RoCE

FY12 23.27

FY11 26.5

FY10 24.82

FY09 16.35

FY08 22.93

Sales CAGR 17% since 2008-09

Current scientist manpower of over 450.
Research focus on developing APIs with non-infringing process and
development of finished dosage forms.
Development of NDDS for domestic and international market.
213 patent applications filed.
65 patents granted (Indian - 47, US PTO - 11, EU- 7).

Corporate ppt http://www.ipcalabs.com/pdf/Ipca_corporate_Presentation.pdf


































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Highlights of the Call by Capital Market:

The Revenues grew by 10% YoY to Rs 834.27 crore for the quarter ended September 2013 driven by the robust growth from the APIs (26%) despite the moderate growth from the Formulations (6%).

The Domestic Formulation grew by moderate 5% YoY to Rs 276.17 crore for the quarter ended September 2013. Also, the Exports Formulation grew by 7% to Rs 362.64 crore for the same period.

The Generic business grew by 32% YoY to Rs 176.83 crore for the quarter ended September 2013. However, the Institutional business fell by 22% YoY to Rs 101.35 crore for the same period.

The Europe market grew by 19% YoY to Rs 85.9 crore for the quarter ended September 2013. However, the US & Canada grew 26% YoY by 60.65 crore for the same period. The CIS& Russia business is down by 16% to Rs 35.52 crore during the quarter.

The margins are higher and had positive impact due to currency gains, positive inventory impact (40% are imports, benefited inventory valuation), and the rest is due to the better product mix and higher realizations during the quarter. If the INR-USD remains at the current levels it expects the 2-2.5% improvement in the margins for the H2 as well.

It had partially impact due to the New Pricing Policy in the Q2 and expects gradually come over in the coming quarter. It expects to have Rs 25-27 crore for the FY’14. The impact due to the Pioglitazone is Rs 4 crore for the H1’FY14.

It further indicated that the issues related to the trade margins are not solved at continue to sell at the lower margins in the domestic market.

It has got price hikes from the Government for the 2 products as part of NLEM policy during the quarter and few more are pending expected to come for approval in the November 2013.

Overall Anti-malarial business fell by 40% during the quarter.

The Anti-malarial business contribution is higher in H1 (23% in Q1, 46% in Q2) compared to the H2(22% in Q1, 9% in Q4). It has not done well in the in the Anti-malarial business but the rest of the business grown well. However, it indicated that it has not lost any market share in Anti-malarial business.

The US FDA found acceptable the Company’s oral solid dosage formulations manufacturing facility situated at Pharmazone, SEZ Indore, Pithampur, Madhya Pradesh. This will enable the Company to commercialize oral solid dosage formulations in the US market from this formulations manufacturing facility. It expects the shipments to start in Q4’FY14. Once this facility commences, It expects the incremental business to the US market will be Rs 80-100 crore for FY’15.

It has filed 36 ANDAs and received approval for the 20 products (commercialized 9) with US FDA as on 30thSeptember 2013.

On 505b2 project, it indicated that clinical trials are undergoing and NDA filing will take 15 months.

It expects the API’s business to grow 10-12% for the H2’FY14.

It expects domestic sales to grow by 15% (Industry to grow by 10%) for the H2’FY14 due good to growth in its therapeutic areas.

It expects 20% growth in Sales for the FY’14 with 200 bps improvement in margins.

It is confident to achieve the earlier target for the Anti-malarial Institutional business for the FY’14.

It targets revenues from the Anti-malarial Institutional business to be in the range of Rs 440-460 crore by FY14, Rs 500 crore by FY15, Rs 600 crore by FY16 and Rs 800 crore by FY’18.

It expects the Capex to be Rs 300-325 crore for the FY14. The majority of the Capex will go to the expanding the formulation facilities.

The Outstanding hedges were at USD 70 million, Out of this USD 20 million for the FY14@ Rs 58 per USD and USD 50 million for the FY’15@ Rs 63 per USD.

The Consolidated debt slightly increase (due to the revaluation) to Rs 676 crore as on 30thSeptember 2013 compared to Rs 676 crore as on 30thMarch 2013.

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I know the company has really good past numbers, the stock tanked today due to http://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/ipca-labs-halts-shipments-to-us-after-food-and-drug-administration-concerns/articleshow/38963533.cms

According to the news revenue impact is only 10% :frowning: If we get a wockhardt like fall it might be very profitable.

Thanks

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I know the company has really good past numbers, the stock tanked today due to http://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/ipca-labs-halts-shipments-to-us-after-food-and-drug-administration-concerns/articleshow/38963533.cms

According to the news revenue impact is only 10% :frowning: If we get a wockhardt like fall it might be very profitable.

Thanks

5

As per this linkhttp://www.reuters.com/article/2014/07/24/ipca-labs-regulator-idUSL4N0PZ1GO20140724

problem in IPCA is similar to issue faced by Ranbaxy and Wockhardt (i.e. related with data integrity issues). I was going through long terms stock price behaviour of Aurobindo, Ranbaxy and Wockhardt which based USA FDA issues in past few years and in all cases stock prices has atleast halved before showing any sign of recovery. IPCA has strong support in range of 300 - 400 and it is very much possible to fall upto that level in next 12 months before any chance of recovery. Management has also said that it may take atleast 4-6 months to fix this issue while real time frame of fixing may be atleast more than 1 year and close scutny of other plants of IPCA. However stoping any shipment to USA market from plant till issue is resolved definetly shows quality and integrity of management.

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Highlights of the call by Capital mkt:

The Sales from promotional market grew by 53% YoY to Rs 111.4 crore for the quarter ended June 2014. The CIS business was up by sharp 94% to Rs 61.69 during the quarter. Also, The South East Asia business grew by 26% YoY 10.54 crore , LATAM markets grew by robust 35% YoY to 8.9 crore and West Asia 27% YoY to Rs 21.08 crore but middle east Africa marginally declined to Rs 9.19 crore.

The Europe business declined by 11% YoY to 77.31 crore for the quarter ended June 2014 due to modification happening (related to packing line) at its plant some shut down has happened. The US and Canada business grew by 14% YoY to Rs 57.02 crore during the quarter.The overall institutional business grew by 35% YoY to Rs 113.65 crore during the quarter.The Overall generics business including the institutional generics business grew by 6% YoY to Rs 271.85 crore for the quarter ended June 2014.

In July 2014, The US FDA inspected Company’s Active Pharmaceutical Ingredients (APls) manufacturing facility situated at Ratlam (Madhya Pradesh) and it has received certain inspection observations in Form 483 from the US FDA. Consequent to this, it has voluntarily decided to temporarily suspend API shipments from this manufacturing facility for the US markets till this issue is addressed.This voluntarily stoppage of API shipments from the Ratlam manufacturing facility will also have impact on the Company’s formulations export business to the US market since the Company’s formulations manufacturing units situated at Piparia (Silvassa) and SEZ, Indore (Pithampur) use the APls manufactured from its Ratlam manufacturing facility for manufacturing formulations for the US market.It exports API’ from Ratlam facility more than 100 countries.

The Institutional business expected to grow by 10% to Rs 480 crore for the FY’15. It has 30% market share in the tender business.It lowered revenue growth guidance to 12% (earlier guided for 15-17%) for the FY’15 to be impacted by issues at Ratlam facility. It is confident that Ratlam facility issues to be resolve and to be commissioned by 6 months timeline. It expects Company EBIDTA margins to be 24% for the FY’15.

The domestic branded business expected to grow 15-17% and RoW markets by 20-25% for the FY’15 respectively. Also, The Domestic API business expected to grow 12-13% going forward.The US business expected to be impacted by issues at Ratlam facility (Q1 normal) in the remaining part of the fiscal.It has filed 3 products with US FDA taking to 43 filings as on 30thJune 2014.The Indore facility is used for the European market also.

The Capex expected to be around Rs 500 crore for the FY’15.The actual tax outgo expected to be MAT rate (in addition to deferred tax) for the FY’15.

The R&D spend is Rs 27 crore in Q1’FY15. The spend on the 505 2b project is lower (~2 crore) during the quarter. The clinical trial of this product will take 6-8 months and will take 8-10 months from the filing.The anti-malarial comes in the July-Sep period and expects to grow well.

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Hi All,

I heard that the IPCA FDA is resolved .Is it true?. If so not sure why the stock is going down inspite of a good Q1.

Have 1% of my portfolio invested in IPCA.

Need advice is it good to buy at the current price or wait for further new.

Thanks in advance.

Hari

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As far as publicly available news, Ipca’s FDA issue is yet to get resolved. I went thro various reports and news and key here is

)- unlike Ranbaxy, there isn’t over dependence on US. I read that 10-15% will be the effect. Even then, the dent can’t be seen in Q2 completely since the firm said existing batches will be tested and used. Only new batches will not be produced in Ratlam plant.

)- ipca has engaged a top notch consultant and also automating the data so that the manual errors which created integrity issues don’t occur.

)- I went to a Conf where Ramdeo Agarwal ( MOST) said that if there is any further fall, he will double his position in IPCA ( for what it is worth). Various brokerages came out with own versions and most have targets of 800-900 odd. There was just 1 skeptic.

)- 2 things will probably decide the course from here. Can they complete all fixes and get the inspection done ( forget the approval, first comes inspection and then comes approval) before Q3?. FDA approval is unpredictable ( Shilpa Medicare approval for Raichur is dragging on for example ). I think, this is an approved plant and the 483 form is for observations and hence getting the inspection done without any critical observation will mean victory since the firm’s stoppage to US is voluntary and after successful inspection, the supply may resume (my 2 cents). 2nd. Can ipca regain lost mkt share? We will know in Q3/4.

Bottom line. Wait and watch. According to me, further fall will be min. It will hover around 720-770 before the air is cleared.

Disc. I hv a big position and my mean price is in 750s

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Highlights of the Call by Capital Mkt;

The Revenues from Formulation business decline by 1% YoY to Rs 634.13 crore for the quarter ended September 2014. The decline was on the back of 17% fall in Formulation exports to Rs 306.22 crore despite 19% growth in domestic formulation business to Rs 327.91 crore.The Revenues from API business fell by 28% YoY to Rs 140.74 crore for the quarter ended September 2014. The fall was on the back of 38% fall in Export business to Rs 96.22 crore despite 10% growth in other income to Rs 44.52 crore.

The Export branded formulation business growth come down to 13% during the quarter. The Institutional generics business was down by 65% during the quarter.The Indore facility was inspected by the US FDA on 17thOctober 2014 and sent response on 7thNovember 2014. There were 6 observations are issued by the US FDA and responded to the US FDA.The Ratlam facility compliance enhancement plans are under progress and expected to be completed e by December 2014 and expected approach the US FDA after this.The API business impacted due to the testing staff is limited the staff is being diverted coupled with some delay. However, the API business expected to be same level.The overall EBIDTA margins expected to be 20-21% for the FY’15.

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FDA import alert

http://economictimes.indiatimes.com/markets/stocks/news/ipca-labs-gets-usfda-import-alert-for-ratlam-plant-stock-down/articleshow/45987027.cms

So much for voluntary stoppage from the facility after 483s to preempt import alert and management assurances of getting it resolved in six months . i suppose this could take atleast two years to go away.

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It will atleast take 2-3 quarters before the us fda issue is resolved. Will have to keep a watch at business after such ban. According to me ipca provides a oppurtunity to buy value in this expensive market . it may fall more from here but accumulation spread over 2015 may reap good benefits years after.

Regards

Divyansh

Disc : ipca forms 30% of my portfolio and plan to accumulate at every dip

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I agree…These are good opportunities to buy a quality company for the long term…These FDA bans rarely matter in the longer term. Experience of bans to other companies has shown that such times have provided good prices…May be will be in the dumps for sometime though…Market will wait for evidence of change before sending the prices northwards

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The following is the clarification from management after the news about import alert broke out in a newspaper broke out today.

The company has clarified about the news of FDA where four API’s are excluded from the import alert.

**With reference to the news item appearing in leading newspaper titled, “IPCA Labs gets USFDA import alert for Ratlam plant”, Ipca Laboratories Ltd has Clarified to BSE that :

"We refer to our letter dated July 24, 2014 informing you about the outcome of US FDA inspection at the Company’s Active Pharmaceutical Ingredients (APls) manufacturing facility situated at Ratlam (Madhya Pradesh), during which the Company received certain inspection observations in Form FDA 483 from the US FDA, consequent to which the Company voluntarily decided to temporarily suspend API shipments from this manufacturing facility for the US markets till this issue is addressed. We now wish to inform you that US FDA has issued an import alert to the said manufactuiing facility on January 22, 2015.

However, the following four API’s manufactured at the said manufacturing facility are excluded from the import alert:
1). Hydroxychloroquine Sulfate
2). Propanolol Hydrochloride
3). Trimethoprim
4). Ondansetron

The Company is fully commttted in resolving this issue at the earliest. The Company is also committed to its philosophy of highest quality in manufacturing, operations, systems, integrity and cGMP culture."**

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Over the past 2-3 years, I have observed that whenever a company lands with USFDA problems there are two to three doses of bad news (sometimes more as in case of auro pharma). But those who buy the stock amidst these bad news usually ends up making money.

just to quote a few examples.

aurobindo pharma – we all know stock tanked from 275 to 90 odd during 2011 and then the stupendous rise to 1100 plus.

wockhardt – Stock fell from 2100 plus levels in March 2013 to 330 in less than a year. From there its currently at around 1100.

Cadilla – From levels of 900 plus in july 11, stock fell down to 600 odd levels by aug 2013 and is now up above 1600 plus.

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All this goes to show that if one can bear near term pain as is there in case of Ipca currently over next couple of years, returns could be quite decent.

disc: invested

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2 Likes
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I asked this question to many senior folks in pharma companies and they seem to have no clear answer. Why do these pharma players get into this kind of trouble? They have seen what happened to Ranbaxy. They make enough free cash flows to make necessary investments in IT, processes and people to avoid this kind of value destructive mistakes. The nature of inspection by FDA is not a mystery anymore. They can also hire external consultants if they lack talent. I assume that most of managements in pharma sector are ethical so it could be lack of foresight or just organisational control.

I have been watching IPCA for sometime and need tothink whether I have patience to hold it despite non-performance.

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Sumit,

No matter how much money is spent by the company in getting top notch consultants, many a times these problems are caused by human errors.

Plus the norms and rules of USFDA are so stringent that something somewhere is bound to happen which is not according to norms.

Having said that a lot of good companies like Sun Pharma, Lupin, Alembic, dr reddys etc have managed to stay clear of the USFDA problems with no or minimal damage. that is not to say that they will not have any future problems.

In my view these USFDA problems continue to create good opportunities time and again for the patient investor who is ready to bear near term pain for long term gains.

1 Like
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I also believe that USFDA issues create great buying opportunities since these are temporary solvable problems that even great companies cant seem to escape. Going by the never a single cockroach theory, when to buy is the conundrum. Wockhardt would have looked a great buying opportunity at several points in it’s downward journey but the problems just kept adding up and everybody was scrambling to get out and stopped coverage of a ‘tainted’ company. I started buying wockhardt a few months ago at ~ 700 , expecting nothing for at least a year (so I am not complaining from returns perspective). However, what makes me jittery is that even when they seem to have put in all remedial measures, it is absolutely underowned with just a couple funds owning 1-2% (even though lupin wanted to buy out) . So maybe nobody wants to touch it until is resolves fda issues and nobody wants to wait either and therein lies the opportunity.

Since these issues typically take couple years, maybe IPCA would be better buying candidate a year down the line? I do want to buy IPCA but dont want to catch a falling knife or have to wait for several years. Your opinion on the timing would be deeply appreciated.

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Hitesh,

I understand what you are saying. This is one of the frequently quoted reasons “human error”. Obviously, the trick is to avoid any possibility of a human error. I read somewhere that Stride Acrolab tried to eliminate human intervention in compliance matters and promoter specially mentions it as non-negotiable.

Anyway, I am also worried about medium term de-rating of the stock. I find it a good compounding machine with many known investors backing it till recently.

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http://blog.metinapharmconsulting.com/2014/02/how-483s-converts-into-warning-letter.html?m=1

thisshedssomelightonthedifferencebetween 483andanimportalert.

483requiresaround 6monthstoclear.that’swhythemanagementwasconfidentaboutclearingitin 6months.butwithimportalertitmaytakemorethan 2years.

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Good to know Hitesh (our goto Pharma guy) has bought IPCA. Yes, there are unknowns as to when these issues will clear, and how much more the stock will fall. Those are just uncertainties, and unknowables. But I’m more interested to hear, how much upside exists, post this period.

If one goes by the 38 EPS figure for FY14 @ 20PE => 760/share => ~19% upside from CMP - which is obviously bad for a contrarian idea with a multi-year wait. So we are looking for at-least some growth. Why would it grow, given that, it can’t sell what it produces currently (due to the ban)?

If Hitesh or anyone who tracks the story comments on how to estimate upside here (or where I’m going wrong), we can have a better picture.

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Ipca had temporarily suspended supplies to US from Ratlam API plant post issue of Form 483 in July â14. Following this, even Indore SEZ and Silvassa formulation plants were inspected and Form 483 issued. However, since no further regulatory action was taken by USFDA, the street assumed early resolution of the issues. Issue of Import Alert changes the scenario and regulatory risk (Warning Letter/ Import Alert at other plants) has been heightened.

I do not think this falls in investment grade at this point. There is a huge looming risk and one cannot reduce the pe to ‘justify’ it, as brokerages are doing currently. This might well be available at another 50% discount a year from now if there are more import alerts coming. That would be the time to load up …and wait…

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