India’s Wockhardt Sees Profit Nosedive On The Weight Of Import Bans

Wockhardt earnings reel from mounting regulatory actions from the U.S., UK and EU. Management pledges restructuring to put the company back on track, but no short-term relief is in sight.

NEW DELHI – Indian drug manufacturer Wockhardt Ltd. is looking at a tough year ahead as it seeks to satisfy global pharmaceutical regulators and re-establish its reputation after reporting a 69.5% dive in quarterly net profit over the prior year, hit by U.S. and British import curbs on its products.

Wockhardt, which makes painkillers, insulin and generics for cardiovascular and neurological ailments, is the latest high-profile Indian pharmaceutical company to run afoul of foreign regulators that have imposed import restrictions over the last six months on three of the company’s dozen factories, including important plants in Chikalthana and Waluj located in western India.

“The current performance has been impacted due to the recent regulatory actions,” Wockhardt Managing Director Murtaza Khorakiwala said in the company’s earnings statement Oct. 25. The company is “committed to raising the bar across all functions and reverting with better performance in all areas of operations at the earliest.”

Wockhardt is undertaking corrective action to settle its regulatory problems, but the process could take up to a year as follow-up inspections will be required, Founder and CEO Habil Khorakiwala told investors during a same-day conference call.

“Probably the entire process would take upwards of a year from now. It could be earlier than that, it could take longer than that, situation is very uncertain,” Khorakiwala said. “It is very difficult to predict actually at this point of time. But I think, the whole organization has been involved in working on it on an emergency basis to put things right. We have got various consultants who are helping us.”

The CEO noted that Wockhardt’s corrective and remediation plan would take roughly six months to implement. “Then we will apply for re-inspection and then it depends on the regulatory agency,” he added.

Macquarie Research said in a note to clients that Wockhardt may not be able to resolve its regulatory issues before the financial year 2015-16.

Vital To Resolved Regulatory Problems

Wockhardt is facing a string of regulatory problems, including a U.S. FDA Import Alert issued May 23 for its injectable and solid dosage facility Waluj in Aurangabad. At the time, Khorakiwala said he anticipated a $100 million negative impact from the Import Alert, which involves detention without inspection of drugs from firms that have deviated from FDA’s good manufacturing practices (Also see "More Indian Sites Under U.S. FDA Lens? Wockhardt Slapped With Import Alert On Injectables Site" - Scrip, 23 May, 2013.).

On the back of the Waluj troubles, Wockhardt reported that second quarter net profit slid to INR 1.4 billion ($22.85 million) for the three months ended Sept. 30, the lowest level in six quarters, and down from INR 4.5 billion in the same period a year earlier. Revenues slid 11.2% to INR 11.97 billion.

“The results were well below expectations,” said Anshuman Gupta and Prashant Nair of Citi Research in a note to clients Oct. 25.

Potentially even more damaging for upcoming quarters, Wockhardt faces a Form 483 due to FDA concerns about its most important plant, Chikalthana, as a result of inspections in July. The Chikalthana facility manufactures metoprolol, a generic of Toprol XL, which is widely prescribed in the U.S. for hypertension, angina and improvement of survival after heart attacks.

The regulatory action against the Chikalthana plant is over alleged hygiene and other compliance deficiencies. According to Bloomberg, which summarized findings from the Form 483, obtained from a Freedom of Information Act request, an FDA team visiting the plant saw urine spilling from open drains, soiled uniforms and mold growing in a raw-material storage site

“Any potential adverse regulatory action from the FDA on L1 (Chikalthana plant) could impact significantly as half of financial year 2015 estimated U.S. sales are dependent on L1,” Macquarie said in its report.

British Impose Ban

On top of FDA problems, Britain’s Medicines and Healthcare Products Regulatory Agency (MHRA) Oct. 14 slapped a restricted GMP certificate on Wockhardt’s Chikalthana and Kadaiya facilities. The agency has permitted the import of just 10 “critical” drugs – ones without feasible alternatives – out of the 22 products Wockhardt normally exports from the plants to Britain (Also see "U.K.'s MHRA Orders Recall Of Wockhardt OTC Drugs From Banned Plant" - Scrip, 17 Oct, 2013.).

The UK drug regulator also initiated a “precautionary recall” July 10 for 16 Wockhardt products from its Waluj plant due to an alleged failure to meet manufacturing guidelines.

The strain on Wockhardt’s performance from the regulatory problems was evident in the second quarter results, analysts said.

The EBITDA margin declined a massive 2,200 basis points year-on-year, to 16.4%, hit by a lower top line, higher costs such as stock write-offs and legal and administrative expenses, Citi noted. Dragging down performance were also one-time costs of INR 600 million pertaining to provisions toward customer credit notes, which analysts say are unlikely to recur.

Revenue from the U.S. business declined 26% year-on-year in constant currency terms, mainly due to the import alert on the Waluj plant that analysts expect will impact performance even more in coming quarters, as well a 15% price decline on metoprolol due to intense competition.

Analysts say the FDA Import Alert has also inflicted collateral damage on other products marketed by Wockhardt.

For the full year to March 2014, Mumbai’s Anand Rath Securities said it expects Wockhardt’s U.S. revenue to fall 22.3%, taking into account a 20% drop in revenue from metoprolol and the impact of the FDA Import Alert.

EU business declined 4.4% year-on-year for the quarter due to substantial decline in sales in Ireland and France. Sales to France slid 18%, while Indian and emerging markets business declined by 7% year-on-year.

Domestic formulations declined 2% during the quarter due to the impact of India’s new drug pricing policy and a ban on the opioid dextropropoxyphene in India, which had contributed INR 1.5 billion to financial year 2012-13 revenue. The drug was banned by the Maharashtra FDA May 23, but the agency alleges Wockhardt continued to sell drugs that contained the banned product.

To counter the perception of laxness, Wockhardt has named a new quality head to oversee production at Chikalthana and is also training plant staff to be more aware of safety issues, in addition to hiring external consultants to help steer changes.

Wockhardt also stepped up capacity at its other Indian plants to offset the regulatory impact on its two biggest markets. But any shift in production will require new approvals from foreign regulators that could take up to three financial quarters, according to analysts.

On the product development side, Wockhardt says it filed three more Abbreviated New Drug Applications during the quarter. The company now has some 53 ANDAs in the pipeline for approval.

Habil Khorakiwala told CNBC that Wockhardt is “taking appropriate measures internally by restructuring the organization” to restore the company’s fortunes.

The regulatory problems mark the first major setback for the Mumbai-based company since 2009 when it defaulted on $110 million worth of foreign currency convertible bond payments and had to renegotiate payment (Also see "Unable To Manage Debts, India’s Wockhardt Calls For Financial Restructuring; Habil Khorakiwala Resigns As Managing Director" - Scrip, 31 Mar, 2009.).