The USFDA inspected Aurobindo Pharma’s (ARBP) Unit 12 from February 10-12, 2020, and issued form 483 with six observations. The regulator has pointed out microbiological contamination, lack of training, inadequate analysis of out-of-specifications, and deficiency in handling of complaints, among others. We believe these issues are resolvable on undertaking robust actions for 3-6 months.
There are no ANDAs pending for approval from this site. Further, most existing products at Unit 12 are also approved to be manufactured in Unit 16. Unit 12 accounts for 3-4% of US sales as a single-source facility, in our view. We remain positive on ARBP and expect 15% earnings CAGR over FY19-22, led by its robust ANDA pipeline and addition of the Sandoz business. However, increasing regulatory concerns (primarily after revocation of Unit 4 classification) prompt us to cut our P/E multiple to 8x (prior: 9x) and revise our TP to Rs 530.
Over the past one year, nine sites have been inspected by the USFDA. Units 1, 11 and 7 have been classified as Official Action Indicated (OAI) and Unit 9 has been issued a warning letter recently. Units 5 and 8 were inspected in October 2019 and classified as voluntary action indicated (VAI). Recently, there has been revocation of inspection classification at Unit 4 and thus we await further clarity from a compliance perspective.
A strong ANDA pipeline (154 pending for approval), potential synergy benefit post closure of Sandoz acquisition, and operating leverage for EU business are reasons for our positive stance on ARBP. However, we reduce our P/E multiple to 8x (from 9x) to factor in the increasing regulatory risk at sites catering to the US market. Accordingly, we revise our TP to Rs 530 (prior: Rs 645). Maintain ‘buy’.
