Cipla the preferred pick in challenging environment, on a comfortable India and EM base and strong US growth outlook
CIPLA received a a FDA Form483 for its Goa Plant (key facility dedicated to the US market), after a facility inspection on 22-25 January 2018. We understand Goa accounts for ~60-65% of total US sales and more than half of pending ANDAs (currently 94 pending ANDAs for Cipla). The FDA noted eight observations in Form483 stating the deviations from cGMP norms, which included deficient standard operating procedures (SOPs) and lapses in laboratory and batch production/control record keeping. As per Cipla, the FDA audit was related to a product-specific pre-approval inspection and not a plant-specific inspection.
Observations mostly procedural: We believe most of the observations cited in Form483 indicate procedure/SOPs deficiencies and there is less likelihood of escalation of issues. In one observation, FDA stated procedures and responsibilities applicable to the quality control (QC) unit are not in writing and not fully followed. The agency also quoted deficient laboratory, batch production and control records. It noted Cipla failed to thoroughly review discrepancy in distributed batches. There were other observations related to procedural lapses such as failure to follow established test methods and failure to examine samples in a timely manner for any evidence of deterioration. Cipla had already responded to the FDA on Form483 and does not foresee any other impact on other products manufactured/filed from Goa.
Maintain Buy rating and Rs 680 TP: Cipla has received two product approvals from Goa since the FDA audit in January 2018; hence we believe current Form483 observations are not serious in nature and Cipla should be able to close them in the near term. Compared with peers, Cipla has a relatively better record in terms of maintaining cGMP compliance at its key facilities (Goa, Indore and Hauppauge [US]).
Cipla remains our preferred pick in a challenging environment, on a comfortable India and EM base and a strong US growth outlook. Unlike peers with significant US exposure, Cipla is relatively immune to growth challenges due to its small base (annual US sales of c$400 m, which is c20% of overall sales). While high R&D expense continues for the future pipeline, we believe operating leverage kicking in with the US sales ramp-up, and ongoing cost-control initiatives should drive margin growth for Cipla. We maintain our Buy rating with an unchanged target price of Rs 680.