Data Sabotage to Moldy Toilets Rerate India’s Wockhardt

Data Sabotage to Moldy Toilets Rerate Wockhardt: Corporate India

Wockhardt Ltd. (WPL), India’s worst performing drug stock this year, is poised to extend its fall from a 15-month low as analysts cut recommendations following U.S. allegations that it blocked inspectors and destroyed data.

When U.S. Food and Drug Administration officials inquired about unlabeled vials at Wockhardt’s Waluj facility in Maharashtra state, employees immediately dumped the contents into drains, the regulator said in a letter dated July 18. The FDA also found torn quality control records in the trash. The note posted on the FDA’s website on July 23 prompted Macquarie Group Ltd. to cut its recommendation on the stock the same day, while CIMB Securities India Pvt. said it’s reviewing its rating.The U.S. regulator, which in May blocked sales from the Waluj plant to the company’s biggest market, warned it may withhold approvals for all new applications made by Wockhardt after it concealed information and delayed inspections. Chairman Habil Khorakiwala’s plan to shift 80 percent of the production to another plant after the export ban may unravel following the latest FDA measure and compel analysts to reduce earnings estimates for the second time in two months.

“The violations are more serious than anticipated, so you would see more downgrades coming,” said Prakash Agarwal, an analyst at CIMB Securities in Mumbai, who’s reviewing his neutral rating on the company’s shares. “It’s clear that there were data integrity issues.”

Shares Plunge

Wockhardt’s shares declined 9.3 percent to 597.9 rupees at 9:51 a.m. in Mumbai, the lowest since March 29, 2012. They have lost 61 percent this year, making the company the worst performing drugmaker in the S&P BSE India Healthcare Index. Wockhardt rose fivefold in 2012.

Macquarie analysts Abhishek Singhal and Kumar Saurabh cut their advice on the stock to neutral from outperform.

Twelve analysts tracking the company rate the stock a buy and four recommend holding the shares, according to data compiled by Bloomberg. The consensus rating, or the average of recommendations updated by analysts in the past year, fell to 4.5 this month. Five denotes a buy and one a sell.

“Wockhardt has already initiated the process of taking corrective measures, including appointment of a leading U.S. based consultant for its Waluj facility,” Managing Director Murtaza Khorakiwala said in an e-mailed statement yesterday.

The FDA, which also pointed to moldy toilets and lack of drainage piping about 20 feet from a sterile formulation manufacturing facility, asked the Mumbai-based drugmaker to explain what it plans to do to prevent the violations from recurring. It also asked Wockhardt to hire an auditor to evaluate the company’s data integrity.

‘Nasty Allegations’

“It’s pretty nasty, the allegations,” said Bino Pathiparampil, an analyst at IIFL Institutional Equities. “What surprised me was that they didn’t cooperate with the investigation. They kind of stopped them from investigating one unit; they prevented them from spending adequate time there.”

Pathiparampil plans to wait to hear the management’s views before reviewing his buy recommendation of the stock.

The restrictions on Wockhardt follow Ranbaxy Laboratories Ltd. (RBXY)’s admission that it sold adulterated drugs in the U.S. The Gurgaon, India-based Ranbaxy on May 14 agreed to a $500 million settlement.

At Wockhardt, FDA inspectors during a week-long inspection in March found discarded data records in the garbage area of the facility, and said Wockhardt’s quality assurance officers had removed some of the material to a different location.

Sealing Defects

Some of the torn data show that batches of drugs failed to meet visual inspection specifications and that up to 14 percent of vials had defects including black particles, fibers, glass particles, sealing defects and volume variations. This ratio of defects would mean, according to the company’s procedures, that an investigation gets initiated. That never happened, according to the FDA.

“The above examples raise serious concerns regarding the integrity, reliability and accuracy of the data generated and available at your facility,” according to the FDA letter addressed to Khorakiwala. “Your firm withheld truthful information, and delayed and limited the inspection.”

The company had planned to move 80 percent of production from the troubled Waluj plant to two nearby facilities, Chairman Khorakiwala, 70, said on the analyst call on May 24, a day after the FDA issued the import alert. The two plants are due for FDA inspection this month or next, Khorakiwala said.

Estimates Cut

Analysts cut their earnings estimates for Wockhardt by 16 percent to an average 13.1 billion rupees in May after the U.S. drug regulator’s alert that month, according to data compiled by Bloomberg. The company’s profit rose fourfold to 15.9 billion rupees in the year ended March 31.

Wockhardt is the latest in a string of injectables-makers including India’s Aurobindo Pharma Ltd. (ARBP) and Lake Forest, Illinois-based Hospira Inc. (HSP) that have come under scrutiny as the FDA steps up surveillance of quality control for medicines administered directly into tissue and veins, requiring an additional level of sterility.

As more drugs lose patent protection, the global market for generic injectable medicines will swell 42 percent to $17 billion by 2020, according to Citigroup Inc.

The FDA’s import alert will cost Wockhardt about $100 million in sales in the year ending March 2014, and will take approximately a year to resolve, Khorakiwala told analysts.

The U.S. accounted for 41 percent of the company’s revenue in the year ended March 31, 2012. Manufacturing for Europe has also been halted, the U.K.’s drug regulator said on July 10. Europe accounted for 27 percent of sales the same year.

It will take more than two years for the plant in Waluj to resume production, CIMB’s Agarwal said. “For the next one to two years there will be no production from that facility.”

To contact the reporter on this story: Ketaki Gokhale in Mumbai at

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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