CLDA has downgraded Cadilla Healthcare from Buy to Sell and has sharply cut the price target of the company from Rs.430 to Rs.250. The justification given for this downgrade is that the recent FDA observations on Cadilla’s Moraiya plant could delay future product approvals. The FDA is the US central body that regulates all pharma and drug approvals and over the last few years it has been constantly pulling up Indian pharma companies about the standards of manufacturing processes and the hygiene factors at the testing centres. This downgrade is because the Moraiya plan contributes nearly 50% of the total US sales of Cadilla and these observations are going to materially impact the company performance.

In the past you would have seen that whenever there are such Form 483 observations on any pharma company, the impact on profits and stock prices is quite sharp. It has been seen that in the case of Sun Pharma and Lupin too where the price damage was quite huge. Hence you need to be careful about holding on to this stock because price damage could be quite sharp from current levels. The stock is already quoting near its yearly lows and at Rs.289, the downside risk still exists. In valuation terms, the stock may look at attractive at around 16-18 times earnings, but such FDA observations are normally not good news for the price. You should look to exit the stock at the earliest opportunity and reallocate.