USFDA warns Cadila, stock dips

Ahmedabad-based pharma-major, Cadilla Healthcare in a stock exchange filing on Thursday informed that they have  received a warning letter issued by the United States Food & Drug Administration (USFDA) relating to its Moraiya formulation facility and Ahmedabad Active Pharmaceutical Ingredient (API) facility (Zyfine) over alleged violation of current good manufacturing practices (cGMP). This is the second time Cadila has received a warning from the USFDA about the Moraiya plant.

According to an estimate, the Moraiya unit contributes substantially to the US sales in the range of 25 to 50 per cent. The facility, also manufactures 40 per cent of its oral dosage. Cadilla however clarified that there are no products in the US market which use API of Zyfine facility.

The warning letter does not augur well for the company as the future product approvals by the FDA will slow down which could subsequently lead to a delay in Cadila Healthcare’s drug launches and the company will also incur cost to fix their manufacturing problems as they step up investments in automation and training of staff. Moreover, these problems will also lead to revenue loss and supply crunch.

The Company in its filing stated that they are taking quality and compliance matters very seriously and stand by the commitment to fully comply with current good manufacturing practices (cGMP) quality standards across all our facilities. The Company will continue to take all necessary steps to ensure that the US FDA is fully satisfied with the remediation of the above facilities. Cadila Healthcare will be responding to the US FDA observations within the statutory time permitted.

In a conference call, the company informed that it has initiated action to transfer some of the products to its other manufacturing sites. Cadila also indicated the company had shifted production of nine drugs from Moraiya to other locations and had initiated the transfer of another four. Also, its new SEZ formulations facility (Oral Oncology, oral solids) received the Establishment Inspection Report (EIR) from the USFDA. Additionally, the company is also hopeful of commissioning its new sterile injectable facility located in Baroda by July 2016.

Even Wockhardt had received a similar warning for one of its manufacturing facilities in 2013 and 2014, which saw the stock plunge more than 20 per cent as investors panicked and sold their positions.  The stock stabilized from its lows and gradually started recovering after clarifications were made. As Cadila has invested a huge amount of capital in its plant,  the Company ensured that they took all necessary steps to ensure that the US FDA is fully satisfied with their remediation of the facilities.

Reacting to the development, the scrip slumped 17 per cent to hit a 52- week low of Rs 320.45 on the BSE before closing for the day at Rs 327.80 down 14.90 per cent. Currently the stock recovered from its previous low to trade at Rs 332.50, up by 1.5 per cent.  

We advise to Hold onto the stock for the moment as clarity is expected to emerge in the coming days with the disclosure of US FDA letter and subsequently the observations made by the authority. Investors should let the stock stabilize at this point of time and not take any hasty decisions both on the ‘Buy’ and ‘Sell’ direction.

In the previous quarter Cadila Healthcare became the fourth major casualty of US FDA warning, others being Dr. Reddy’s Laboratories, Sun Pharma & Novartis AG which have faced the regulator's ire in the past.