Last week’s news was the best Cadila Healthcare Ltd’s investors have heard since 31 December 2015. Its share rose by 25% over two days after its Moraiya facility passed an inspection by the US drug regulator. That’s after it disclosed over a year ago it had got a warning letter. When this facility got the warning letter, its supplies accounted for around 60% of Cadila’s US sales. And, this site also accounted for 40% of Cadila’s pending generic applications, which were put on hold. That is how important Moraiya was to the company.
Cadila did transfer some of these filings to other sites, to avoid losing out on revenues from relatively significant products. These cost money but also take time to transfer.
Cadila also salvaged a significant product affected by this development, by launching the authorized generic of Asacol HD, a drug to treat ulcerative colitis. This was better than not launching at all, but would have been less remunerative than a drug made at Moraiya. The September and December quarters saw revenues from this launch. Even with this launch, the pressure on Cadila’s performance was evident. In the December quarter, US market sales declined over a year ago by 17.2% and sequentially by 10.3%. The market contributed to 48% of formulation sales till the third quarter of FY17. A results note from Prabhudas Lilladher said that lack of meaningful generic approvals due to the Moraiya issue was affecting US and EU sales. Price erosion in its core US portfolio too was a problem. The decline in US sales affected profitability as well, with its operating profit margin declining by 4.3 percentage points sequentially to 17.5%. Net profit fell by 38.7% from a year ago and by 16.4% sequentially.
It is in this context that the Moraiya green signal gains significance. The Prabhudas Lilladher note had cast doubt on Cadila’s guidance of approvals for 12-15 new drug applications in FY17, given it had got only six in the first nine months. In December 2015, the company said 74 filings were done from Moraiya but new filings were being done from unaffected facilities. Filings for injectable products would still be done from here.
The share price jump could be for two reasons. One, the big picture view is that Cadila has managed to restore investor confidence in its ability to attain compliance with USFDA norms. The hope is that this will be the last of such negative developments for the company. Two, the more material impact will be on revenues once approvals start flowing in. In a conference call, after its June quarter results, Cadila’s management had said that it expects a significant number of approvals to be released, once the site is declared compliant. If that happens, US growth should look markedly better and overall profitability will improve too.