Shilpa Medicare - USFDA import alert at Jadcherla unit - ICICI Securities

Shilpa Medicare (Shilpa) announced that USFDA has imposed an import alert on its Jadcherla unit, its only oncology formulation manufacturing facility. This facility was inspected by the USFDA in Feb'20 with fifteen observations, of which, four were repeat observations and was later issued a warning letter in Oct'20. The revenue contribution from this facility was ~23% of total sales in 9MFY21. Three large products (Azacitidine, Erlotinib and Cyclophosphamide) have been exempted and company can continue to be sell them considering potential shortage in US market, however, USFDA has the option to reconsider its stance as the demand and supply for these product normalises. We view this development to negatively impact the company, since oncology formulation was key growth driver. Downgrade to Reduce from Hold.

- Import Alert on Jadcherla unit: Jadcherla is a formulation manufacturing facility for sterile as well as non-sterile oncology products. This facility was inspected in Feb'20, post which it received fifteen observations. These observations included four repeat observations from their prior inspection. Later this facility was issued a warning letter in Oct'20 with two citations - 1) inadequate handling of OOS and 2) inadequate handling of market complaints, including failure to file FAR within stipulated time. Now an import alert has been imposed which means, existing approved products from this facility can no longer be marketed in US until USFDA provides clearance to the plant. However, three large products namely, Azacitidine, Erlotinib and Cyclophosphamide have been exempted and can be supplied to US however, USFDA has the option to reconsider its stance.

- Impact on financials: Total formulations revenue for the company in FY20 was ~21% of total sales and ~23% in 9MFY21, that are being sold in the US and EU. The contribution of the three exempted products was ~69% in FY20 ~86% in 9MFY21 of the formulations sales. If USFDA observes that the demand and supply for these three products has normalised, it can rescind the exemption on these three products. Formulations business was expected to be key growth driver and anecdotally, we believe resolution may take over two years. Hence, we reduce revenue and earnings estimates by 9-14% and 10-17%, respectively, to factor in delay of new product approvals due to import alert.

- Outlook: We are now negative on stock considering import alert may take few years to resolve and we estimate flattish earnings over FY20-FY23E. We believe the company's strategy of building high value oncology pipeline for regulated markets would get delayed and success in 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 (earlier: Rs448/share based on 20xFY23E). We have cut target P/E(x) from 20x to 18x due to import alert which would impact growth over medium term. Key up risks: Early resolution of import alert, scale-up in EU sales and earlier than estimated success in biosimilars or transdermals.

Shares of SHILPA MEDICARE LTD. was last trading in BSE at Rs.386 as compared to the previous close of Rs. 426.1. The total number of shares traded during the day was 161595 in over 8235 trades.

The stock hit an intraday high of Rs. 425.6 and intraday low of 378.25. The net turnover during the day was Rs. 63643073.

Source : Equity Bulls

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