LUpin’s facilities in Goa and Pithampur (Unit II) have been issued a combined warning letter (WL) by the US FDA. Goa received three observations on April 7, 2017 and Pithampur (Unit II) received six observations on May 19, 2017. While this does not impact current product supplies to the US, we believe any delay in the timely approval of key products will impact FY18 and FY19 earnings. Lupin’s management indicated in the investor call recently that no data integrity issues were cited in the WL, but it expects to take about six months (maximum) to address the issues mentioned in the WL. We believe WL resolution timelines have varied for different companies and can range between 12 and 18 months depending upon reinspection requirements. We cut our sales and EPS forecasts for FY18/FY19 by 2/2% and 4/4%, respectively, as we lower our US sales assumptions. Our EPS estimates are 6/20% below consensus for FY18/19. We reduce our target price to Rs 910 (from Rs 945). Maintaining Hold.
No data integrity issues, but two major areas of concern highlighted in WL: Lupin will approach the FDA for further clarifications and engage consultants for the remediation measures. As per the company, the FDA has highlighted two areas of common concern: (i) Handling of out-of-specification (OOS) results: Lupin believes that in regard to invalidation of OOS, the key question was about the adequacy of investigation (ii) Conduct of hold time studies: Lupin believes that it needs to hold an entire batch and undertake hold time studies retrospectively from Jan 2014. Site transfers for 12 products; c40-50 ANDAs pending for Goa and Pithampur: Lupin has c.152 approvals pending, of which 49 are FTF opportunities (25 exclusive). Goa and Pithampur account for c40-50 of pending ANDAs, with 25-30 launches in FY18/19. Lupin has identified 12 products to be site transferred to address the opportunities in the next 12-18 months.
US launches: gRenvela, gWelchol — filed from Goa; Propranolol and gToprol XL — filed from Pithampur Unit II; Levothyroxine — filed from Unit I (Q4FY18 launch); gRanexa — may require bio studies, late opportunity (FY19); gTamiflu suspension — filed from Aurangabad plant. Pithampur has three units: Unit I caters to OCs and high potency, Unit II to oral solid dosage and opthal, and Unit III to derma and inhalation. Valuation and risks We lower our target price to Rs 910 (from Rs 945), based on a target PER of 21x FY19E recurring EPS. Key downside risks: delay in resolving warning letter at Goa and Pithampur (unit II), lower-than-expected sales growth in the Indian market, increased pricing pressure in US generics, and delays in US approvals. Key upside risks: more approvals in the US and greater-than-expected market growth in India.