Shilpa Medicare tanks over 4% on USFDA observations

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Shilpa Medicare shares fell by over 4.7% today after it received observations from United States Food & Drug Administration (USFDA) in relation to SEZ formulation facilities situated at Jadcherla, Telangana. Out of the 10 observations, 7 are related to improvement in procedures and practices and 3 observations are related to setting of analytical specifications, test procedures and method validation. USFDA communicates any deviations in manufacturing practices observed during the inspection on Form 483. Typically, the company needs to respond to USFDA within a period of 15 days with a corrective action plan. Shilpa Medicare Limited started its operations as API manufacturer in the year 1987 at Raichur, Karnataka- India. It is engaged in high-quality Active Pharmaceutical Ingredients (APIs), Intermediates, Formulations, New Drug Delivery Systems, Peptides/Biotech products and Specialty Chemicals. In FY17, over 71% of the revenues/sales are generated through exports. On a consolidated basis, the company has registered a 5 year CAGR of 21% and 22.3% in operating profit and net profit respectively. In FY17, the expenditure growth was higher than the revenue growth compared to FY16. Revenue grew by 8.7% whereas the total expenditure grew by 10.2%. Growth in total expenditure was led by employee cost that grew over 40%. Raw material costs jumped by 12.7%. Substantial increase in other income and reduction in interest costs helped the bottom-line which grew at 4.95% yoy. Its debt levels increased by more than 2.6 times between FY16 and FY17. The total debt (short term plus long term) increased from Rs 90.73 crores in FY16 to Rs 239.7 crores in FY17.Looking at the current consolidated quarter numbers, the company witnessed a decline in sales revenue by over 3% in Sep’17 quarter compared to Sep’16 quarter. Helped by reduction in total expenditure (-9.24%) and fall in interest costs (-7.91%) , it registered a healthy net profit growth of 27.8%.  Company’s stock significantly underperformed BSE Sensex in the last one year. However, it outperformed BSE Healthcare index. Between 5 Dec 2016 and 5 Dec 2017, Shilpa Medicare lost -3.2% compared to BSE Healthcare index that lost -11.25%. BSE Sensex gained 24.5%.Indian pharmaceutical sector is facing quality issues as several pharma companies have received warning letters from USFDA to adhere to quality standards and data integrity. Several Indian manufacturing facilities were inspected by USFDA and observed issues like releasing failed products, inadequate out-of-specific investigation, inadequate corrective and preventive action and fabrication of failed results. With nearly 480 USFDA approved plants, India has the world’s highest capacity to produce US-compliant pharma products, besides the US. In the backdrop of WHO report that said one out of every 10 medicines in the developing world including India is fake, is a worrying trend. 

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