Wockhardt - A story with twist and turn

Wockhardt seems to be a stock with twist and turn. After recent turn around, it again started turning around due to recent USA FDA and UK heath regulator issue. Company is high quality and have ability to manufacture high quality medicines. Also spend more than 5 % of their annual revenue on R & D which is among highest among all Indian pharma companies.US FDA warning is common in pharma industry and even issued to global pharma giants like Pfizer, Glaxo etc in the past without seriously damaging their business prospects in long run.Can it has ability to turn itself around once again ?(last time it was saved because of sale of its food supplement business in about 1100 cr).

The type of behavior they have shown during FDA inspection is absolutely deplorable. This is not just some small time lapse, that might be happening in other company. This include non-cooperation with FDA guys, throwing reports in dust bins, vials full of liquid in wash-tub in front of FDA guys. God save Wockhardt !!!

This shows the true quality manufacturing/RnD of Wockhardt. After such incident you will end up with a management/company to whom no one trusts: neither FDA, nor doctors who prescribes drug, nor patient, nor investor.

http://articles.economictimes.indiatimes.com/2013-07-26/news/40815018_1_warning-letter-import-alert-wockhardt-pharma

Subash you are correct and issue is indeed serious nature. I dont have much ideas about pharma operation of the company but few year back i have visited their hospitals and it appears truely world class in every respect unseen in indian healthcare industry. Regarding quality and manufacturing process concern i have my doubt of indian pharma companies in general and think that it may be common across in varying degrees (take for example case of ranbaxy which is in public domain.) which may be mainly due to weak nature of our food and safety regulations and its implementation. Trying to block/obstruct for carrying inspection is definetly deplorable.

Link of US FDA warning letter toWockhardt:

http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/2013/ucm361928.htm

Judging risk factor of these warnings is subjective judgement, but it appears that no physical stoppage of inspection happened but mainly concern with ability to provide all required data and statistics and maintain it properly for review and required as per regulation.

Conference Call highlights by Capital Market

  • The US business was aprox USD 150 million in Q4'FY13 declined to USD 125 million in Q1'FY14. The sales impacted by the 10-15% pricing pressure in the limited competition portfolio, import alert of the EOU facility (minimal in Q1 and will come more next quarters) coupled with the seasonal impact during the quarter. However, YoY there is 7% growth in dollar terms.
  • It has filed 4 new product applications with USFDA during the quarter, taking the cumulative products pending approval with USFDA stands at 50 as on June 2013.
  • The toprol (14% of sales) maintained market share during the quarter.
  • In Pursuant to Import Alert issued in May 2013, US FDA issued a Warning Letter in July for the Waluj Facility. This facility has one oral solid unit and two injectable units. The Observations include - Need to increase laboratory controls, Enhancement of training programs, Enhancement in quality systems, Enhancement in Facility Maintenance. Further, USFDA has recommended help of third party GMP Consultancy Firm
  • The US FDA continues to allow import of ENALAPRIL into USA from the same plant.
  • The Company appointed US based M/s. Lachman GMP Consultant INC USA , to conduct a detailed review of site and oversee implementation of Action Plan to meet FDA Requirements . Further, it indicated that working with USFDA to resolve the issues at the earliest.
  • Also, UK MHRA initiated a PRECAUTIONARY RECALL of 16 product lines to UK Market from the Waluj facility. Wockhardt is working with UK MHRA to resolve the issues at the earliest.
  • Notably, The USFDA and UK MHRA have also conducted inspections at Chikalthana, Shendra and Cephalosporin plants during the month of July 13. They raised certain observations at Chikalthana plant and further Services of the consultants appointed for Waluj are also being extended to Chikalthana.
  • The Chikalthana facility has 483's observation from US FDA, few are major and few are minor in nature. It is reviewing all the Questions and by the next week expected to respond to the US FDA. It indicated that it is difficult to predict outcome from the USFDA, but this plant is better positioned than the waluj facility and confident of not receiving any import alert or warning letter from USFDA.
  • The Chikalthana is largest revenue contributing facility, which had USD 230 million in revenues for FY'13. The facility is catering mainly to the US and UK markets. Also, the toprol is one of the products from the facility.
  • The Waluj facility most of the observations are related to the injectible facility. The waluj EOU product shifting to alternative facility will take some time.
  • It expected to file 15 products with US FDA for the FY'14.
  • The Comtan and Stalevo sales were not impacted by the import alert.
  • The domestic business growth was impacted due to uncertainty in trade due to NLEM issues, strike by retailers in Maharashtra and suspension of sale of Dextropropoxyphene.
  • The impact due to NLEM expected to be Rs 20 crore on annualized basis.
  • The Government of India has suspended the manufacture and sale of Dextroproxyphene and formulation containing the same. It received the communication of the same on 10th June 13 and immediately stopped manufacturing and selling the same. It has challenged the suspension and the matter is subjudice. This product is contributing Rs 120 crore to the India business. It is trying to mitigate this by few other product (about 7 products in Q2) launches going forward.
  • The sales from the ROW operations declined by 28% during the quarter. There were lower sales booking in Russia due to orders being pushed to Q2.
  • The company increased its Research spent significantly and the same is now at 7.2% to sales at Rs98 crores and including capital expenditure is at 7.7% to sales during the quarter.
  • The Capital expenditure of Rs 68 crore was incurred during the quarter.
  • The Interest cost down due to the retiring the debt last year. The tax rate expected to be 15% for the FY'14.
  • The Consolidated Cash is at Rs 1200 crore and Debt is at Rs 2000 crore as on 30thJune 2013. It is not looking for M&A as the future growth drivers but may look for technology or niche areas as of strategic in nature.

BhatiaJi thanks for sharing this important information about Wockhardt concall. Also one important piece of info is that all pledge share is revoked by promoters and now promoters hold more than 70 % in the company. Also for some plants already company has received approval from US/UK FDA so its means atleast company has ability to improve upon plants in question and resume the export at the earliest within next 2 years, so these regulatory issues seem to have temporary setback for the company and not permanent in nature.

Highlights of the Call by Capital Market:

  • The US business declines by 19% (-26% in dollar terms), India & Emerging Markets Business declines by 7% but Europe Business (Other than France) grows by 2% (France declines by 18%) during the quarter.
  • The fall in US business is on account of import alert on Waluj products and certain one off provisions towards customer credit notes.
  • The EBIDTA impacted by Rs 80-90 crore on the back of remediation efforts, stock write offs and legal expenses during the quarter.
  • It has filed 3 ANDAs with US FDA during the quarter, taking the total ANDAs pending for approval to 53 as on 30thSeptember 2013.
  • It also filed for 36 patents during the quarter taking the cumulative filings to 1792 and has been granted 12 patents during the quarter taking the cumulative patents granted to 232.
  • It has filed 7 new product applications with USFDA during the 1st half year. It launched 13 new products in India in Q2FY14 and introduced 2 new divisions in India. In UK, it received 3 approvals and launched 1 product during the quarter.
  • Also, The UK sales were impacted due to reversals on account of product recalls during the quarter. It has launched 1 product in UK during the quarter. Further, it indicated that there is fundamental shift in the Irish market from the branded-generic to generic market.
  • The India Business declined by 2% during the quarter in the backdrop of suspension of Dextropropoxyphene and uncertainty due to NLEM related issues. Also, the Emerging Markets business declined by 21% during the quarter and by 24% in H1FY14.
  • The remediation measures have been initiated at Waluj facility, baseline assessment completed by Lachman, training on cGMP and Data Integrity is completed, restructuring of the Quality function at corporate and at site completed and a remediation plan is in progress as informed to FDA and MHRA.
  • The company has challenged the suspension on Spasmoproxyvon and the matter is sub-judice.
  • The US FDA and UK MHRA conducted inspections at Chikalthana during July 2013. It has issued a restricted GMP certificate for the Chikalthana facility to allow manufacture of 10 critical products whilst withdrawing the GMP certification of the said facility. The net impact of UKMHRA actions on the revenues is estimated to be approximately £ 9m on an annualised basis. Further, UKMHRA has also issued a Drug Alert for recall of certain (and not all) non-critical products that were manufactured at Chikalthana, however, it has reiterated that there is no evidence of risk to patient safety from the products being recalled.
  • The company has already responded to the 483 observations given by US FDA and there has been no further update on the same over the Chikalthana facility. It indicated that it can export to the US until any further action from the USFDA.
  • Also, The UK MHRA conducted inspections at Kadaiya facility during September 2013. It will be issuing a restricted GMP certificate for the Kadaiya facility to allow manufacture of certain critical products while it has withdrawn the GMP certificate for the said facility. The net impact of the same shall be known once UKMHRA issues the restricted GMP certificate.
  • Also, the inspection at Shendra facility by UKMHRA & Irish Medicine Board was completed satisfactorily in July 2013 with no Critical observations. The inspection of Shendra facility by USFDA is due in a short time.
  • The Waluj Cephalosporin facility inspection by USFDA was completed satisfactorily. The Bhimpore facility in Daman was inspected by UKMHRA in September 2013 and the same was completed satisfactorily with few non-critical observations.
  • The Baddi facility was inspected by USFDA & UKMHRA in September 2013 and the same was completed satisfactorily with minor observations. The Wrexham, UK facility was inspected by UKMHRA in July 2013 & by USFDA in September 2013 and the same was completed satisfactorily
  • It doesn’t indicated any timeline to resolve issues over all of its facilities, but may take at least one year to resolve all this things.
  • The Capital Expenditure is at Rs 208 crore during H1FY14
  • The R&D expenses at 10.2% of Sales in Q2FY14 and at 8.8% of sales in H1FY14.
  • The Net Debt to Equity now at 0.21 as against 0.36 as of 31st Mar 2013.
  • The Free Cash Flow (before Capex) generation of over Rs 700 crore during H1FY14

Hi,

Can someone please explain why tax rate for this company is low compared to other pharma companies?

I read this thread but couldn’t locateinfo.

Sunil

Hi,

Can someone please explain why tax rate for this company is low compared to other pharma companies?

I read this thread but couldn’t locateinfo.

Sunil

Wockhardt - Uncertainty or risk ? - soliciting advice from fellow investors

As we know, times of uncertainty in great businesses can be great buying opportunities for the patient investor. In current times, where nothing is available at a reasonable valuation, have been looking up wockhardt. Following are excerpts from AR and few articles:

Buyers emerge:

Goverment Pension Fund Global and Merrill Lynch have acquired over 1% stake each in the past quarter as per shareholding pattern

http://www.bloomberg.com/news/2014-08-25/lupin-studied-possible-wockhardt-deal-no-talks-ongoing.html

Lupin,Managing Director Nilesh Gupta said in an Aug. 22 interview - Weâve certainly looked at it. It doesnât hurt to always do that kind of analysis…From that perspective, I would personally find the Wockhardt deal interesting, but there really are no talks going on at all.

Financials: From AR

Net Debt to Equity Ratio stands at 0.05 as against 0.36 as of March 31, 2013. Interest and financing cost has been pared down by 61% from 215 crore in FY 2012-13 to 83 crore in FY 2013-14.

R&D: From AR

Industry-leading R&D spends as a percentage of total revenues keeps rising year-on-year regardless of sales performance.Continuing our industry-leading position,our R&D expenditure of 450 crore at 9.3% of total sales is almost 20% higher over last year’s R&D spend of 376 crore.

Across our three facilities, 850 scientists and research associates are blazing new trails that are reflected in Wockhardt’s 271 patents filed and 50 patents awarded in FY 2013-14, taking our cumulative patent filings to 2001 and global patents awarded to 259. Not surprisingly, we have won the Government of India and Pharmexcil award for maximum number of patents granted for the 5th consecutive year.

REGULATORY CHALLENGE (From AR)

During the year, the company faced a challenge in managing the compliance requirements from the regulating authorities from US FDA and UK MHRA. The warnings and alert however did not impact the inventories lying in USA which indicates that there is no serious quality concern as far as manufactured products is concerned but lacking the requirements in regulation and regulatory practices as per the current Good Manufacturing Practices (cGMP), which is a dynamic body of regulatory practices.

Further, USFDA has also excluded 6 products and the supply of the same continues to the US market from the same plants. The actions by UKMHRA were however were less severe, allowing the Company to manufacture and supply 21 products. The UKMHRA had also initiated drug recalls for the products manufactured at two Aurangabad facilities, but has categorically mentioned that the recalls were only precautionary and there was no risk to patient safety.

Faced with the import alert and warnings in its manufacturing plants making drugs for these two markets, the company undertook a remedial exercise to improve the conditions and bring the operations back to approvable levels for these two markets. The manufacturing and compliance organizations were restructured to ensure appropriate coverage of every aspect that falls under the purview of the regulatory agencies with a clear identification, diagnosis and resolution plan of action forany reported incident. Further all critical activities in these domains have been identified and Standard Operating Procedures (SOPs) have been modified to make them and other activities easier to manage and improve the overall quality outcome.

The Top Management is directly involved in the exercise and is assisted by ex-FDA consulting experts who helped design a gamut of activity to manage the manufacturing process and identify critical check. The organization along with these experts have also developed and put in place a long term learning and training program for all those involved in the manufacturing and compliance activities so that they can be appropriately appraised with the latest changes in regulatory practices andundertake a certification courses for the same. Another major initiative has been enhancement of technological advancement within these setups to bring them to the advanced scale and a slew of major Information Technology (IT) consultants are involved in the same. This would also minimise the human intervention and thus reduce the risk of error.

The organization believes that these challenges will be met with the stringent practices and improvement of SOPs and the organization will be back on track in these geographies in near future.

From last available Concall:

Expenses related to regulatory issues : approximately Rs.30 crores for the 9 months which includes the FDA expenses, consultancy expenses and some of the air freight cost and legal cost. There is a CAPEX involvement in various upgradation that we are doing in our equipments and our laboratory and the IT systems, so that is part of the remediation cost. Additionally, we are strengthening our manpower and our people at various facilities and in manufacturing and quality, so that is also an additional cost. We have recruited over 200 new employees to strengthen key departments and have introduced a series of changes at the management and top executive levels.

Expected Timeline :

Mgt - I think we should be able to resolve these issues by 14-15, and the following year 15-16 we should start reviving some of the business that has been affected by the suspension, We are keeping our lines of communication open with them, we are communicating regularly on the update in terms of what are the compliances and improvements that we are doing, and based on that the agency is actually taking a call on when to come and inspect us.

The UK drug regulator, Medicines and Healthcare Products Regulatory Agency (MHRA), has confirmed that it would inspect the plant between September 1 and 5.

“This is the third inspection by MHRA, and we have already attended to the last few observations. We hope to get their approval soon after the inspection. After MHRA’s nod, we are hopeful of US Food and Drug Administration’s approval,” a senior company official said.

Investment Case:

Considering the above, it’s been over a year and company has already spent lots of money, effort and focus on issue resolution. The issues were pretty damning but nothing that could not be resolved or are unheard of now even in cos like Sun. It is a risk that we have to live with and will eventually make the pharma cos world class. The pharma bull run is a long term story and not going to be over anytime soon.

They hired a very senior guy from Dr Reddy’s to look after regulatory affairs (http://articles.economictimes.indiatimes.com/2014-01-14/news/46185480_1_uk-drug-regulator-mhra-wockhardt) I guess such things can take upto two years for full resolution. Hopefully MHRA is coming for another inspection next week and we might get an update on their initial feedback in the AGM in mid sep. Based on that, FDA might come this FY (or not). We are seeing fund buying emerge already.The company’s financial position has only strengthened with it becoming nearly debt free and focus on IP has not diminished. So it’s not a stressed asset. Is it good value at CMP for a patient investor? I do think the risk reward is favourable for the patient investor. Even Lupin saw value and wanted to buy out but was not entertained. Lupin cant buy … but we can!

Discl: starter position, had bought MCX few months ago around 500 on the same premise of low risk, high uncertainty

Link: http://www.bloomberg.com/news/2014-08-25/lupin-studied-possible-wockhardt-deal-no-talks-ongoing.html Weave doesnat forany andundertake Link: http://www.dnaindia.com/money/report-wockhardt-s-plant-may-soon-get-out-of-regulatory-woes-2005778 (http://articles.economictimes.indiatimes.com/2014-01-14/news/46185480_1_uk-drug-regulator-mhra-wockhardt Link: http://articles.economictimes.indiatimes.com/2014-01-14/news/46185480_1_uk-drug-regulator-mhra-wockhardt )

Hi,

There is a warren buffett quote “Buy good stocks when they are on the operating table”.

To get a sense of perspective assuming that Wockhard were not entangled into their regulatory woes it would have commanded a EPS of 150 and price in excess of Rs. 3000.
So you can imagine the upside in there. To get a stock which has such a strong balance sheet (almost debt free) but which is beaten down due to short term issues is an awesome opportunity.

From their investor communication they have not compromised on their R and D. They have filed 13 new product applications in Q1 and their total pending applications are 75 now. They have actually spent 111 crore in R and D this quarter even in this turmoil.

So this is a stock that will reward patience. The stock price will oscillate violently till the approvals come by.

A negative is on the status of their third plant at Morton Chicago. If this comes under import alert it could cause a Rs. 300 downside from current price.

The chicago plant does have an overhang… not sure of the potential downside though. When the news had broken out towards end May, there wasnt too much of a negative reaction. When a stock refuses to react to bad news, it has bottomed out. I remember being amused the last time I saw Wockhardt in ‘smart gainers’, the news was of some drug recall due to some failure :wink:

As of current Q,USA business for Wockhardt contributed 29.0% of the Global Revenues. As per AR, the Morton Grove subsidiary had a turnover of 382Cr and a PAT of 4.6cr last year.

FDA approvals have become big triggers for stock rerating but it’s a waiting game as they take a long time coming

check 123

Is anybody attending AGM?

N Sood ,Thanks for Very insightful report.

Drug maker Wockhardt today said that two of its anti-infective drugs have received Qualified Infectious Disease Product (QIDP) status from the US health regulator. Two drugs --WCK 771 and WCK 2349 – have received QIDP status, which allows fast-track review of the drug application by the US Food and Drug Administration (USFDA), Wockhardt said in a statement. This is the first instance of an Indian pharmaceutical company receiving QIDP status, it added. Commenting on the development, Wockhardt Founder Chairman and Group CEO Dr Habil Khorakiwala said, “This is indeed a proud moment for us. Not only does the status allow for fast- track review of our drug application, it also grants a five- year extension to the drug patents in the USA, which is a major support for the commercial aspect of the drug.” These drugs will be entering their global Phase-3 clinical trials early next year, he added. QIDP status is granted to drugs which act against pathogens which have a high degree of unmet need in their treatment and are identified by the Centre for Disease Control, USA, a top US government health and safety body. WCK 771 is an intravenous (IV) drug while WCK 2349 is a solid oral tablet. Both act against Methicillin-resistant Staphylococcus Aureus (MRSA), which causes a range of diseases from skin infection to severe respiratory infections. “In case of severe infections like Hospital Acquired Pneumonia (HAP), current medical cure has a very limited reach, causing a high unmet need and mortality. Both of these drugs are effective against MRSA and have shown potential in treatment of HAP,” it added.

Read more at:http://www.moneycontrol.com/news/business/usfda-grants-qidp-status-to-two-wockhardt-drugs_1167341.html?utm_source=ref_article

any one tracking this company, with couple of approvals coming in for namenda generic in usa and gleevec generic in uk. can one take a fresh look at this company as valuations seem to be compelling.

With Waluj Plant approval coming in as reported by ET, is there a case for re rating?

Views Invited from people tracking the company.

Disc. - Invested

I think this company is due for rerating based on following observations

  • US FDA issue is now 2.5 years old (started in May 2013) . Average time taken to resolve US FDA issues with other pharma companies is around 2 years. Wockhardt has data integrity issues so they are taking longer.
  • Management started receiving US FDA approvals for individual drugs after gap of almost 2 years. In June 2015, it received approval of analgesic drug Oxycodone Hydrochloride. In Sept 2015, it received approval for Memantine Hydrocholride (for alzheimers’). This shows positive bias of US FDA towards the company
  • Management continues to spend one of the highest spend on R&D in the industry. % of R&D Spend to Sales for Q1 FY 16 was 13.3% vs 11.5% for FY 15, 9.3% FY 14.
  • Promoters stake is around 75% and they did not reduce it in last 2 years, although interest shown by companies like Lupin. This shows their confidence about their future.

Disc - Invested from lower levels.