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McClatchy-Tribune  06/19/2014 3:48 AM ET
FDA scrutiny of US unit looms over Wockhardt [Mint, New Delhi :: ]

June 19--MUMBAI -- Just two years after emerging from a financial crisis caused by derivative bets gone awry, Mumbai-based drug maker Wockhardt Ltd is confronting more trouble -- this time in the form of penal action by the US regulator.

The US Food and Drug Administration (FDA), which last year banned generic drug imports from Wockhardt's plants at Waluj and Chikalthana in Maharashtra citing flawed manufacturing processes, on 27 May voiced concern about production quality at the company's US unit.

An FDA warning letter or order to stop sales to the Chicago-based unit, Morton Groves Pharmaceuticals Inc., will lead to a complete erosion of US sales for the company that in the year ended 31 March 2013 derived half its overall revenue of $1.03 billion from the world's biggest drug market. In the year just gone by, revenue fell 26% because of the import ban on its generic sales.

According to a US-based manufacturing compliance expert, who didn't want to be named, the FDA's recent observations about the Chicago plant would necessarily be followed up by a warning letter, which effectively is a sales ban on the factory.

Before the import ban on the plants in Maharashtra, the Chicago facility contributed half of Wockhardt's US revenue.

Wockhardt declined to comment for this story. A detailed questionnaire sent to chairman Habil Khorakiwala and the company's spokesperson on 7 June remained unanswered at the time of going to press on Wednesday.

Wockhardt's management said at an analyst meeting last month that it had responded to the FDA's notice on Morton Grove, and that if the regulator was not satisfied with the response, it could ban production from the Chicago-based unit.

Wockhardt shares have dropped around 70% since the FDA action against its Waluj factory in May 2013, followed by the ban on the Chikalthana plant in September. The stock lost 2.17% to close at Rs.578.60 per share on Wednesday on BSE, while the benchmark Sensex lost 1.08% to 25,246.25 points.

To be sure, Wockhardt is not the only Indian company to have run into trouble with the US regulator. Other top Indian drug makers including Ranbaxy Laboratories Ltd and Sun Pharmaceutical Industries Ltd, which decided in April to merge, have also been penalized by the FDA in the last couple of years for failing to comply with manufacturing standards.

The potential crisis would give a sense of deja vu to Wockhardt, which took four years to recover from the last one that struck it in 2008 at the height of the global financial crisis, when it took a hit of about Rs.6,000 crore because of forex losses on derivatives trades and went on to report losses for 16 consecutive quarters.

It defaulted on foreign currency convertible bonds and entered a corporate debt restructuring (CDR) exercise from which it emerged in 2012, helped along the way by its strong focus on the US market, the sale of its nutrition business to French food company Danone SA, and the divestment of the promoters' privately held hospital venture and some other non-core assets, including a German subsidiary.

"A total sales ban in the US could turn the company's financials back to its 2008 position," said one industry analyst, who didn't want to be named.

A potential ban on the Chicago plant means Wockhardt stands to lose half its revenue. The FDA has alleged serious lapses in the manufacturing practices and quality monitoring. It has alleged testing failures and the lack of proper training for employees, and flagged issues related to data integrity, and hygiene and sanitation in production areas.

Adding to the woes, Wockhardt's sales in India as well as Europe have been affected by slow market growth in the past several quarters. A new drug price control order that took effect in July has affected the revenues of Wockhardt as well as its competitors.

"If the US revenue is affected, the company ought to face severe financial pressure as its pending liabilities and other financial commitments (as per the already closed corporate debt restructuring scheme including the extended loans and others) will resurface," said Ranjit Kapadia, vice-president (institutional research) at Centrum Broking Ltd.

Wockhardt repaid part of its Rs.3,800 crore of debt, including emergency liabilities such as bond redemptions and loans raised against share pledges, by selling some of its non-core assets during the CDR exercise in 2009-12.

"But the company needs to continue servicing the rest of the loans and other liabilities, which have been restructured as per the CDR with an extended tenure up to 2017 and later," said Kapadia.

Wockhardt had debt of Rs.1,313 crore as on 31 March 2014. The inflation-linked cost escalation in manufacturing, material cost and labour would also put pressure on its financials.

"The manufacturing compliance issue has not only affected its revenue, but also added its liabilities in terms of expenses for corrective measures and possible penalties," said a sector analyst with a foreign brokerage, who didn't want to be identified.

Wockhardt's international business contributed at least 79% of its overall revenue during 2013-14. While US sales declined by more than one-quarter, its UK business posted growth of just 3% and Ireland (where it has a major presence) posted a decline of 15% in the year. Wockhardt's India business grew only 2% last year.

 

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