Wockhardt Under Pressure,posts nearly 30% drop in net profit

Mumbai: Drug maker Wockhardt Ltd, which faced a US import ban on two of its factories at Aurangabad in Maharashtra in 2013, posted a near-30% drop in net profit to Rs.304.4 crore in the December quarter from the year-ago period’s Rs.427.8 crore. Sales in the quarter dropped to Rs.1,322.7 crore from Rs.1,428.5 crore a year ago.

Besides the drop in sales, one-time expenses including an arbitration cost associated with its French subsidiary and an inventory write-off on account of the import ban and a foreign exchange loss also contributed to the decrease in profit during the quarter ended 31 December.

“The company received an import alert from the US Food and Drug Administration (US FDA) on its formulation plant at Chikalthane in Aurangabad during the October-December quarter,” it said in a statement to stock exchanges on Monday.

Earlier, another Wockhardt formulation plant at Waluj in Aurangabad had also come under the US FDA’s import alert. A cumulative sales loss of about $200 million was expected due to the US import ban during fiscal 2014, the company had said earlier.

The company had said it has “already initiated various measures to resolve the quality compliance issues at the Aurangabad plants”.

Despite the drop in profit and sales, Wockhardt stock rose 4.02%% toRs.415.60 at 12.40pm on BSE on Monday. The Sensex was largely unchanged at 20,358.60 points.

The company’s stock shot up on expectations that a resolution of issues with FDA is nearing, said a pharma analyst with a local brokerage. Wockhardt chairman Habil Khorakiwala had a discussion with USFDA chiefMargaret Hamburg on Monday.

The heads of Indian drug makers including Ranbaxy Laboratories Ltd,Cadila Healthcare Ltd and Wockhardt had a formal meeting with Hamburg in New Delhi on Monday to discuss pending manufacturing compliance issues with the US regulator.

Wockhardt, which earns 79% of revenue from international markets, posted 30% decline in sales in the US. The US market contributes almost 45% of the company’s international revenue. Sales in the UK, its largest market until 2009, grew 10% in the December quarter.

The company changed its overseas strategy by focusing more on the high-margin US market after a financial setback in 2009. It managed strong growth in the US market by filing for a large number of drug approvals. Its US sales more than tripled in the next four years from 15% of revenue to about 47%. But the import alerts by the US FDA last year took their toll on its growth.

Wockhardt was hit hard by mark-to-market losses in the last quarter of fiscal 2009. That was followed by a string of quarterly losses and a default on foreign currency bonds, which prompted creditors to move a petition in the Bombay high court to wind up the firm.

The company, which failed to repay other debts including bank loans, sought corporate debt restructuring (CDR) in 2010, emerging successfully from the exercise before it was tripped up by the US FDA’s ban on its Aurangabad units.

Wockhardt’s sales in the domestic market grew just 6% in the December quarter, against the 13-14% growth in domestic sales reported by its competitors.What does it cost a drugmaker to get crosswise with the FDA about quality manufacturing? In the case of India’s Wockhardt, a lot. In fact, it lopped off nearly a third of its sales in the U.S. market last quarter.

The Indian drugmaker–which had two manufacturing plants banned last year from exporting to the U.S.–said that its sales for the quarter were down 14%, or 1,237 crore ($198.2 million), while its U.S. sales were off 30%. It reported that its sales in the U.S. still accounted for 44% of the total. Its profit for the quarter was down 29% to about $48.8 million. The FDA issued an import alert against the company’s first plant in May of last year, but the second didn’t come until late November–meaning Wockhardt can expect even more depressed U.S. sales in the current quarter.

The drugmaker reported its financials Sunday night, just ahead of meetings to be held by FDA Commissioner Margaret Hamburg with government and industry leaders in her first official meeting to India. Besides the actions against Wockhardt, the FDA in the last 6 months has also banned two Ranbaxy Laboratories plants from shipping to the U.S., a move that left it reporting a loss in the last quarter. The shattered earnings for the two companies add a talking point to both sides in the discussion about the FDA’s expectations when it comes to quality manufacturing

Last time when the Wockhardt shares shot up a whopping 350% was in 2012 after the drug firm successfully came out of debt restructuring.

This time buffeted by issues with the US Food and Drug Administration, the stock is again in doldrums — between April and December it lost 83%, down to a new low of Rs 339.85 from Rs 2,024.90 at the start of the fiscal.

And now rooting for an encore is Prashant Jain, chief investment officer of HDFC MF, India’s largest fund house, who known for taking contra calls and unusual bets that have paid off.

As Wockhardt stock nosedived, several retail investors and mutual fund houses started dumping it.

In the same period, Jain quietly picked up the pharma firm’s shares.

Till April last year, HDFC MF had zero shares of Wockhardt, whereas other mutual funds held 10.34 lakh shares.

By September end, HDFC has 13.59 lakh shares, a whooping 97% of the total shares held by mutual fund houses.

Out of the total 1.36% shares of Wockhardt held by MFs, Jain alone holds 1.29%.

Under Jain’s watch, the asset under management of HDFC MF have grown to mammoth size of Rs 108,990 crore.

And market experts believe that this contra call by Jain may pay off.

An expert with a foreign brokerage said, “The rationale behind Prashant Jain’s optimism has to do with his philosophy on finding deep value stocks which he can hold, and expect higher value to unravel when it tides through difficult times. To me, the recent stock correction factors a worst-case scenario.”

A pharma analyst from a leading domestic brokerage added, “Fundamentally, despite trouble with US FDA, the residual business would have enough earnings power to justify current price. The current balance-sheet health is much stronger than ever, and hereon there can only be upside to earnings outlook. The kind of turnaround Prashant Jain has seen in Aurobindo could be something he is betting on in case of Wockhardt, once the regulatory issues are tackled.”

Bad times for Wockhardt started in May after the USFDA put an import alert on its Waluj plant and intensified between May and November, when the company being hauled up four more times by the US and the UK drug regulators.

Sarabjit Kour Nangra, VP-research, pharma, Angel Broking also believes that Jain’s bet may pay off.

“The Wockhardt stock took significant beating last year and has probably gone through the worst times. But one needs to also take into account that the company successfully came out of the financial mess in the years before that and Jain is certainly betting on its revival from the US FDA and UK Medicines and Healthcare Products Regulatory Agency issues,” said Nangra.

“One also needs to remember that Wockhardt is one of the biggest players in the pharma industry and investors with a long-term view would certainly take exposure as the risk-reward is huge,” she said.

Wockhardt stock has been recovering slowly and is now trading at Rs 424.95, already up 25% from the December low of Rs 339.85.

Wockhardt’s foreign drug regulator alerts
May 2013 – US Food and Drug Administration import alert on Waluj Plant

July – UK Medicines and Healthcare Products Regulatory Agency (UK MHRA) import alert on Waluj plant

Oct – UK MHRA withdraws Good Manufacturing Practice (GMP) certificate for Daman plant

Oct – UK MHRA withdraws GMP for Chikalthana plant

Nov- US FDA import alert on Chikalthana plant

Dec – US FDA import alert on Chikalthana and Waluj units for veterinary drugs