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Cadila Healthcare’s Gujarat plant served USFDA warning letter

Cadila Healthcare ended over four percent lower on Monday reacting to news that its Moraiya facility located in Gujarat receiving a warning letter from the US Federal Drug Authorities or the USFDA.
The news while negative wasn’t entirely unexpected. The street was closely watching the developments at the Moraiya facility ever since it was inspected for two weeks in April and May this year. The USFDA inspectors issued 14 observations to the facility at the end of the inspection. While the company clarified that there were no repeat observations from earlier inspections or any issues with the integrity of the data, the street was not fully convinced.
The observations related to potential product contamination, inadequate documentation and data storage. CLSA downgraded the stock soon after to a “sell” from a “buy” and cut the FY20 and FY21 estimated EPS by 19 to 24 percent. Analysts say the observations are worrying and that product contamination issues have increased the probability of a “warning letter”.
The probability of a warning letter increased further as in August 2019 when the USFDA issued an “official action indicated” or OAI status to the Moraiya facility. The OAI status is the most serious of three qualifications that can be issued to a plant. The most positive is NAI or “no action indicated”, which means the facility is cleared and business continues as usual. The second is VAI or “voluntary action indicated”. It means the facility is cleared but the company has to complete the required remediation.
If the USFDA is satisfied with the remediation undertaken by the company it will not need to re-inspect the plant. Lastly, and OAI status indicates that observations are serious enough for the USFDA to re-inspect the facility to ensure the required remediation is undertaken. If they are not satisfied with the remediation then they can issue a warning letter. This was exactly the case with Cadila. After the 14 observations and an OAI status, the street was preparing itself for a warning letter.
The stakes are high for Cadila when it comes to the Moraiya facility. It is one of their most important plants when it comes to the US business. The plant contributes to around 45-50 percent of total US sales. Edelweiss pegs the total contribution at $400 million of total revenue. Some of the key products filed from the plant are generic versions of ulcerative colitis drugs Asacol HD and Lialda.
While a warning letter does not impact the existing production from a plant it, however, does impact future filings and approvals from the facility. In this case, Cadila has 32 pending drug filings from the plant, which is over 30 percent of its total filings for the US. The company has also said new products are being filed from another facility. It is also transferring approved injectable products to its Liva facility, the transfer is expected by end of this fiscal.
The next steps depend on the company’s remediation of the facility. Cadila says it will continue to take necessary steps USFDA is fully satisfied with the remediation. The company’s track record also makes the street optimistic. This is the second warning letter issued to the plant in the span of 4 to 5 years. The company resolved the first warning letter in a span of two years. It was issued a warning letter in December 2015 and was eventually resolved in 2017.
The stock has largely priced in the negatives. On a year to date basis, the stock has corrected 30 percent losing 20 percent of its market cap since the start of May itself. However, it has bounced back a little over 10 percent from its August lows.

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