Shilpa Medicare – USFDA import alert to the Jadcherla unit – ICICI Securities

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Shilpa Medicare (Shilpa) announced that the USFDA has imposed an import alert on its unit in Jadcherla, its only oncology formulation manufacturing facility. This facility was inspected by the USFDA on February 20 with fifteen sightings, four of which were repeat sightings and subsequently received a warning letter in October 20. The revenue contribution from this facility was approximately 23% of sales. total in 9MFY21. Three major products (Azacitidine, Erlotinib and Cyclophosphamide) have been exempted and the company may continue to sell them given a potential shortage in the US market. However, the USFDA has the opportunity to reconsider its position as demand and supply for these products normalize. We consider this development to have a negative impact on the company, as the oncology formulation has been a key growth driver. Downgrade to Reduce Hold.

– Import alert on the Jadcherla unit: Jadcherla is a manufacturing plant for sterile and non-sterile oncology product formulations. This facility was inspected on February 20, after which it received fifteen sightings. These sightings included four repeated sightings from their previous inspection. This facility later received a warning letter on October 20 with two citations – 1) inadequate handling of OOS and 2) inadequate handling of market complaints, including failure to file FAR on time. Now, an Import Alert has been imposed, which means that existing approved products from this facility can no longer be marketed in the United States until the USFDA provides authorization to the factory. However, three major products, namely azacitidine, erlotinib and cyclophosphamide, have been exempted and can be supplied in the United States. However, the USFDA has the opportunity to reconsider its position.

– Financial impact: Total formulations revenue for the company in FY2020 was around 21% of total sales and around 23% in FY9MFY21, which are sold in the US and the EU. The contribution of the three exempt products was approximately 69% in FY20 and 86% in FY9MFY21 from sales of formulations. If the USFDA finds that demand and supply for these three commodities have normalized, it can revoke the exemption on those three commodities. The Formulations business was to be a key growth driver and, for the record, we believe that resolution could take more than two years. Therefore, we are reducing the revenue and profit estimates by 9-14% and 10-17%, respectively, to account for the delay in new product approvals due to an import alert.

– Outlook: We are now negative on equities as the import alert may take a few years to resolve and we estimate flattened earnings over 20-year 23E. We believe that the company’s strategy of creating a high-value oncology pipeline for regulated markets would be delayed and that the success of biosimilars / biologics would also take time.

– Valuations and Risks: Downgrade to REDUCE from Hold with a revised target price of Rs336 / share based on 18xFY23E (previously: Rs448 / share based on 20xFY23E). We have reduced the target P / E (x) from 20x to 18x due to an import alert that would impact growth in the medium term. Key risks: rapid resolution of import alert, increased sales in the EU and earlier than expected success for biosimilars or transdermal drugs.

Shares of SHILPA MEDICARE LTD. was last trading on BSE at Rs.386 from the previous close of Rs. 426.1. The total number of shares traded during the day was 161,595 in more than 8,235 trades.

The action hit an intraday high of Rs. 425.6 and an intraday low of 378.25. The net turnover during the day was Rs. 63,643,073.

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