The details of Aurobindo Unit IV Form 483 were released on May 8. The observations are largely procedural around testing and written procedures. There are though two observations on (i) facility/equipment maintenance and (ii) control over records which could be serious. FDA may require retrospective studies for the maintenance observation which could delay approvals though we don’t expect escalation to warning letter.
Event — access to Form 483 of injectable facility
The Federal Drug Administration (FDA) had inspected Aurobindo’s injectable facility, Unit IV, between April 20-28, 2017. Post the inspection it had issued Form 483 with 7 observations. Unit IV contributes c14% of Aurobindo’s US revenues at current run rate. The facility has 75 ANDAs filed with 30+ pending approval.
Observations largely procedural
The observations are largely procedural around out of specification inspections, testing and written procedures. However, there are 2 observations which could be serious depending on FDA’s view.
o Building and Manufacturing equipment is not maintained — This observation mentions that floor had cuts which make it difficult to clean, dried and cracked repairs and sealant particles on floor and equipment’s not maintained adequately. These may require retrospective environmental studies.
o Appropriate controls over computer not exercised — Mentions how master records are maintained on two parallel system. The DMS manager does not print records from the document management software but the other system. While the observation states that record of prints is kept, it can be taken as serious by the inspector.
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Do not expect escalation but approvals could be delayed
We do not expect an escalation to warning letter or import alert for the facility. Approvals though could be delayed. Unit IV contributes c6% of US revenues but we expect significant ramp-up over the next few years. There are 30+ products pending from the facility which if delayed would impact near term earnings.
Aurobindo remains the best placed US generic player; valuations provide comfort
Aurobindo is best placed to overcome the pricing erosion and growth challenges in US led by cost leadership, large ANDA pipeline, timely approvals and highest approval rate among peers, in our view. Aurobindo continues to see strong approval and launch pace with 20 approvals and 8 launches in Q317, ahead of peers. Additionally, it has the one of the largest pending pipelines with 159 pending ANDAs. This provides comfort on our EPS growth expectation of 19% CAGR over FY16-19. The stock is trading at a significant discount to peers which provides comfort. Aurobindo is a generic pharma company with significant presence in US EU and the ARV tender market.