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Wockhardt price fall: What to do?
Apr 15, 2013

The stock of Wockhardt has taken a major beating on the bourses since the last couple of days (down almost 18%). The primary reason for this seems to be various reported sources stating that the USFDA (United States Food and Drug Administration) has issued some 483s on Wockhardt's injectable facility located at Aurangabad. In order to get more clarity on this issue, we spoke to the management of Wockhardt.

The management has so far not shared details on this, except to confirm that some 483s were issued and the company is working to resolve the issue. Further, no time line is given by the management, as to when a USFDA response can be expected. So far, the company has not disclosed any details about the event.

We also enquired about the CDR (Corporate debt restructuring) status of the company. As per the conference call in February 2013, the management had guided that it will exit CDR in few weeks. As per our recent conversation with the company management, the company is still into various procedures and expects to exit CDR in some time.

What are 483s?

As per the USFDA website - "An FDA Form 483 is issued to firm management at the conclusion of an inspection when an investigator(s) has observed any conditions that in their judgment may constitute violations of the Food Drug and Cosmetic (FD&C) Act and related Acts. FDA investigators are trained to ensure that each observation noted on the FDA Form 483 is clear, specific and significant. Observations are made when in the investigator's judgment, conditions or practices observed would indicate that any food, drug, device or cosmetic has been adulterated or is being prepared, packed, or held under conditions whereby it may become adulterated or rendered injurious to health".

Our view

The 483s have been given on Wockhardt's injectable facility. By nature injectables are complex products and have high standards of manufacturing requirements as compared to the other vanilla drugs. As the regulatory procedures are also stringent, the entry barriers are high and thus the margins on these products are more than on other drugs. Even the competition is low for some types of injectables. Having said that, if Wockhardt fails to meet the USFDA's requirements, than there is a probability that USFDA may issue warning letter on the said facility.

The company has not disclosed the extent of the revenue contribution from this facility or how many drugs are pending for approval. It is also important to note, that the said facility is the only injectable plant where the company holds USFDA approval. We thus view this event very cautiously. As on date, the company holds approval of approximately 30-35 injectables.

Based on our estimates, the current price signifies a buying opportunity. However, there are uncertainties regarding the response of the USFDA with respect to this event and the time taken by the company to exit CDR. We thus, recommend our investors to Hold on to the stock, until more clarity appears on these issues. Please do not buy more of the stock at current levels.

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