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US FDA’s Alert On Wockhardt: Much Ado About Nothing?

| 5/30/2013 9:02 PM Thursday

Pharma giant Wockhardt has received a strong setback after the US FDA sounded an alert on its Waluj manufacturing facility, after which the stock was hammered by more than 25 per cent in just two trading sessions. The market, however, seems to be overreacting to these developments. Shrikant Akolkar tells us more.

One of the worst things to happen to any stock is for it to get hit by factors which are apparently serious but on deeper exploration seem to be routine. This happens chiefly due to investors’ knee-jerk reaction to news flows which creates humongous negativity around it. One company which has recently been hit by this syndrome is Wockhardt.

We had recommended Wockhardt in DSIJ Vol. 28, Issue # 9 (dated 21 April, 2013) in our cover story ‘Cherry Picking’. The scrip was severely hammered following the recent US FDA alert on its manufacturing facility located in Waluj, Aurangabad district of Maharashtra. In just two trading sessions alone (May 23 and 24, 2013) it lost more than 25 per cent in value. Currently, the stock is down 35 per cent from where we had recommended it. Investors who have acted on our advice would surely be jittery in the wake of such a slide in the stock’s price. What should their future course in this counter be? Should one sell and book losses or wait out the depression? Here are the answers that you would be looking out for.

To start with, the hammering of the stock was a knee-jerk reaction arising out of fears fuelled by a particular event. This fear was accentuated by many other factors that were external to the company. The principal factor among these was the developments in Ranbaxy earlier in the same week.

Ranbaxy, the pharma company now owned by Daichhi Sankyo, pleaded guilty before the United States Department of Justice on compliance related issues in two of its manufacturing facilities. This was in any case weighing heavily on pharma stocks. The alert on Wockhardt’s Waluj facility came immediately after this, and dampened the sentiment on the stock.

What is worth noting is that Ranbaxy had ignored earlier malpractices, the consequences of which it had to bear. Wockhardt, however, had invited the US FDA team to audit its new injectables unit at Waluj. This is what differentiates between the two companies.

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