In a very surprising announcement, Caraco today announced some update on the FDA compliance and management changes. Caraco tends to be shy about PR, so any update on operations is out of the ordinary. Today’s announcement had quite a few items diclosed, most of them were good news.
– New CEO: Caraco announced that G. P. Singh Sachdeva will become CEO starting Nov 1st. It was surprising to see Jitendra Doshi leave Caraco. Doshi has been a staple with Sun Pharma and Caraco. Doshi did a great job with Caraco when Sun Pharma initially signed the 25 drug transfer agreement and again with the recent compliance issues. I’ve been watching Singh since he became the VP of Sales in 2003. I had a hunch that he was on path to becoming CEO. It is always good to have an internal employee get promoted to CEO.
– On track for 2011 production resumption: The company said it was on track to start production of 2 drugs by end of Fiscal 2011 (March 2011). The company is on track for 2011 production start. The company also mentioned it is planning another 2-3 drugs to start production by Q3 of 2012 (Dec ’12).
Having a CEO announced and stating that the company is on track to resume production is great news. The management team is executing and no major surprises for shareholders.
The only bad news that I could read from today’s announcement was:
Accordingly, by the end of Fiscal 2012, the Company expects to be manufacturing and distributing four or five products with a total minimal annualized sales volume. The Company will be required to augment this minimal volume of sales by the sale of Caraco owned products manufactured at third party sites and sales of distributed products.
All of the Company’s prior approved products, together with the new products pending approval from the FDA, will be subject to these same processes, certification and approvals as set forth in the Consent Decree. The Company believes that, even assuming a smooth remediation process, it will take significant time before the Company reaches its previous levels of manufacturing in its Detroit facility.
The news that the remediation process will take a significant time for CPD to regain previous level of manufacturing was a bit unexpected. I expected CPD would receive approval in stages. I had not expected it taking almost 2 years. This means the high margin revenue for the company will have to wait quite a bit more than I expected. The management is transferring CPD drugs to third party sites for manufacturing. This will help CPD bring in revenue.
My take is the short term story on this company is different than what I expected. Today’s announcement of production of 2-3 drugs in FY 2012, is very different than what I had expected. The long-run story on this company is still on track. In ‘special situation’ investment plays, the short-term play on the investment idea can change quickly. As an investor you have to look at both the short-term and the long run of these companies. Although the revenue and cash flow for Caraco will be weak for the next 18 months, I still firmly believe in the long term story for this company.
What do I do next? I would not be surprised if we see some big pull back on the shares in the short-term. With the company expecting to resume manufacturing of 4-5 drugs in about 18 months, many short-term investors will exit. I still believe the company is exceptionally well positioned to gain from the growth in generic drugs. The company has an exceptionally strong pipeline, one of the best management team in the generic pharma industry, and a strong balance sheet. I will be looking to add more if the shares pull back substantially.