The stock of drug maker Ipca Laboratories is down 13 per cent this calendar year due to regulatory worries and weak third quarter results.

Earlier this month, the company reported that it received a warning letter from the US Federal Drug Administration (FDA) for three of its manufacturing units at Ratlam, Pithampur and Piparia. This was in continuation of the import alerts received for these units in early 2015.

Next, Ipca Labs’ sales and profit declined in the recent December quarter. Revenue was down 8 per cent year-on-year to ₹689 crore.

This was primarily due to export income falling 19 per cent to ₹338 crore — the result of the company reducing exports due to regulatory issues. Net profit at about ₹23 crore in the December quarter was down 44 per cent compared with the year-ago period.

For the nine months ended December 2015, sales and profit were down 11 per cent and 78 per cent,respectively, year-on-year. This was on account of regulatory issues, reduced revenues from institutional anti-malarial sales, adverse currency movements and increased compliance costs. EBIDTA margin came in at 12 per cent as against 20 per cent in the nine months ended FY 2015.

Not surprisingly, the stock has taken a beating, losing about a fourth from its mid-August 2015 highs. But this presents a buying opportunity for investors with a long-term perspective. One, the valuation seems attractive. The stock trades at about 21 times its estimated 2016-17 earnings. This implies an over 30 per cent discount to the S&P BSE Healthcare Index.

Next, despite recent sub-par results, the company’s long-term prospects seem sound. Growth in domestic sales, remediation of the regulatory observations resulting in improved export performance, and pick up in its institutional anti-malarial business are expected to drive growth.

Regulatory hiccups

In January 2015, the company’s production unit at Ratlam in Madhya Pradesh was served an import alert notice citing non-compliance with norms mandated by the US drug regulator.

This unit manufactures active pharmaceutical ingredients (APIs). Subsequently in March 2015, two of its finished dosage formulations facilities at Pitampur in Madhya Pradesh and Piparia in Dadra and Nagar Haveli received import alerts from the US FDA. Nevertheless, Ipca Labs had voluntarily halted affected API shipments from the Ratlam facility even before a formal order was issued by the US FDA.

However, subsequently, four APIs manufactured at Ratlam were excluded from the import alert due to acute shortage in the US.

Resolving regulatory issues is critical for Ipca Labs to achieve revenue and profit growth. The management is working with four agencies to resolve the problems. It has made investments in software and process automation.

Further, to ensure regulatory compliance, the company is conducting stability tests and third-party verification on formulations. These measures should hopefully bear fruit over the coming years.

The company has a promising pipeline of products. Of the 41 generic formulation ANDA applications filed with the US FDA, 18 have been approved. The company has also filed 48 Drug Master Files.

The management expects to begin shipments of anti-rheumatic drug Hydroxychloroquine (HCQS) to the US over the next 12 months and expects decent market share and pricing.

Once its anti-malarial drug deliveries to the Global Fund — a public-private partnership financing agency focusing on preventing and treating HIV and AIDS, TB and malaria — commences, its share of about a third of the $166-million contract should provide a fillip to exports.

Besides, the company is pursuing a strategy of growth through acquisitions.

n 2014-15, it acquired a manufacturing unit (oral dosage) based at Pithampur from Alpa Laboratories for about ₹72 crore. With its other facility at Nandesari, Gujarat manufacturing hormonal APIs, this acquisition should help Ipca improve profitability through captive sourcing of APIs.

Also, Ipca’s 31 per cent stake in Krebs Biochem accumulated in February 2015 through an off-market transaction and in November 2015 by an open offer brings two units in Nellore and Visakhapatnam into Ipca Labs’ manufacturing fold.

It can use the Krebs facilities to ship products to the US markets and expects to seek clearance with the US FDA in the next 12 to 18 months time.

The completion of its green field project at Vadodara, larger and better equipped than its Ratlam plant, is expected to boost revenues.

The company is also pursuing an aggressive growth strategy in the home market.

Domestic thrust

With its 13 therapy focussed marketing divisions, Ipca, currently the leader in the anti-malarial and rheumatoid arthritis space, is looking to garner a large share of the high-margin chronic therapy segment.

Focus on chronic therapies, such as cardiovascular, anti-rheumatic and pain management, should help the company achieve healthy growth in the domestic market.

During the period 2014-15, the company stepped up its spending on research and development (R&D) to 5.16 per cent from 3.87 per cent of sales in the previous year. This can contribute to higher sales and profit growth in the coming years.

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Published on February 21, 2016