Panacea Biotec Falters on Quality Front

Panacea Biotec Falters on Quality Front

Q2 results not good

Panacea Biotec has not produced good results for the quarter ended 30.09.11 as compared to the quarter ended 30.06.11. Revenue has almost remained the same at Rs.228 crore. The company slid into a net loss of Rs.33.64 crore as compared to a net profit of Rs.16.72 crore. Revenue for the whole year 2010-11 was at Rs.1152 crore and net profit was at Rs.135 crore. Operating profit margin was negative and so also net profit margin. The shares of Panacea Biotec are traded in the Indian stock markets at Rs.103.45 now (11.11.11). The highest price the share recorded during the last one year was at Rs.226 (10.11.10) and the lowest price was at Rs.88 (25.10.11).

From pediatric vaccines to vaccines for all ages

Panacea Biotec is in vaccine making business. Till few years back, vaccine making companies were not recorded high by the investors and the stock markets. But with onset of diseases like Swine Flu and Hepatitis-B, investors are beginning to notice the performance of vaccine making companies like Panacea Biotec. Asia is emerging as the vaccine hub of the world. Within Asia, India is the preferred low-cost production base. India also possesses a vast pool of talented scientists and technocrats. The present market size of vaccines in India is estimated to be around $900 million. It is estimated to grow over 20% in 2012. Panacea Biotec caters to paediatric vaccines at present. But it hopes to graduate to adolescent and adult vaccines by the year 2014. By that time, Panacea Biotec plans to offer all types of vaccines to people of all ages. By 2020, the company will be offering adult vaccines for human papilliomavirus, rotavirus, Japanese encephalitis and dengue fever.

No attraction for PEs

But these plans are for long term. Right now the company’s financial position is not good. Vaccine production is a capital intensive activity with long gestation periods. Companies like Panacea Biotec need upfront and milestone payments to finance their R&D activities. For this, they need to coordinate with Private Equity funds, Venture Capitalists, pharmaceutical companies, Universities, Research bodies and health organisations like UNICEF, WHO etc. They also need to coordinate their activities with the global organisation GAVI (Global Alliance for Vaccines and Immunisation). Most of the purchasers of the company’s vaccines are UN Agencies. The company does not attract much Private Equity attention as on date. For making the company attractive to the PE companies, Panacea Biotec needs to constantly shuffle its portfolio and develop innovative products that are in great demand the world over.

For each country, vaccine requirements differ

Vaccine market is growing in developing and under-developed countries much more than developed nations like USA or UK. This is because various diseases attack developing nations because of unhygienic conditions, lack of infrastructure, lack of clean habits, lack of healthy foods for most of the population and a host of other factors ranging from social to political. Therefore Panacea Biotec needs to concentrate on markets in developing countries in Asia in order to increase its sales and profits. But there are complications. Within Asian continent, each country has its own diseases. It is not a uniform portfolio for the continent as a whole. Therefore Panacea Biotec needs to study the requirements of each country and offer solutions to the problem.

Combination vaccines preferred over multiple vaccines

Pakistan and China possess more vaccines in their immunisation programmes. In India, vaccine manufacturers like Panacea Biotec face many challenges like supply chain issues, price point pressure and not so clear regulations. Panacea Biotec is seeing growth in pentavalent vaccine globally. It is one of the few producers of this vaccine. Panacea Biotec was the first Indian vaccine company to launch branded vaccines like Easyfour, Ecovac and Easyfive. The global market prefers combination vaccines that can prevent multiple diseases. Instead of injecting vaccines for each disease, which cause immense pain for the person vaccinated, it is preferable to use a single dose of vaccine for a combination of diseases. Panacea Biotec bagged a major order from UNICEF to supply 75 million doses of Easyfive (Pentavalent). This order will add the sales turnover of the company by $222 million from 2010 to 2012. On account of a product mix, the company’s margins may also improve. But the first thing an investor cares is whether it is a profit making company or not. If profits have to come, then the company should be producing quality products. It is here that Panacea Biotec has slipped somewhere from its cherished aim of producing and supplying all types of vaccines for all ages.

WHO disqualifies the company’s vaccines on quality count

World Health Organisation (WHO) disqualified three vaccines of Panacea Biotec. After the news came out, the company’s share price fell by 20% in the stock markets. WHO made this decision after inspecting the company’s plant in Lalru in Punjab State in India in June-July. WHO delisted Pentavalent Easyfive, Ecovac4 and hepatitis B vaccine Enivac HB. WHO spotted deficiencies in the company’s quality management system. Until a final decision is taken, Panacea Biotec has been asked by WHO to put on hold its shipments of the above vaccines. Companies are allowed to bid for WHO tenders for supplying drugs only if their vaccines are in WHO’s list of pre-qualified vaccines. Panacea Biotec stated that it has taken the corrective measures. After taking corrective measures, the company will have to re-apply for re-listing of the vaccines to WHO. All these things will take time. But the main question that arises is why was the company found wanting in the quality control measures? Was it not aware that a defective vaccine lagging behind in quality will put the users’ lives in danger?

Do not touch the shares even with a barge pole

At the current share price of Rs.105, investors are advised not to enter into the company’s shares now because of the following reasons:

  • The company is a loss making one
  • The company has not taken care of the quality of the vaccines it produced and attracted adverse comments and delisting from the WHO. A company that produces substandard products is a substandard company. Investors should boycott such a company. In business, there is a saying ‘if you run after money, money will run away from you. But if you run after quality, money will chase you’.

Vaccine production involves long gestation period

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