Analyst Corner: Recommend ‘buy’ with target price of Rs 913 on Lupin

Published: January 15, 2020 5:10:34 AM

The clearance of Goa and Indore formulation sites may not be sufficient to gain approval in cases where API is from Tarapur.

Lupin failed to expand the investigation to other API batches that may also have been contaminated. Lupin failed to expand the investigation to other API batches that may also have been contaminated.

By Nomura AEJ

Lupin on Tuesday announced that its Tarapur API facility has been classified as OAI (Official Action Indicated) following the inspection in September 2019. New ANDA approvals linked to the API produced at Tarapur are likely to be withheld. The inspection had led to three Form 483 observations. There was contamination of metal particles in a certain API batch. This contamination could be on account of the usage of certain equipment in the production process or inappropriate cleaning. Lupin failed to expand the investigation to other API batches that may also have been contaminated. These products were eventually distributed in the US market.

Similarly, the impact of damage in equipment on API quality was not thoroughly probed for multiple API batches. There was lack of control on documentation of production process. Certain changes were not properly documented and implemented without involvement of the quality department. One key issue highlighted in the first observation is deeper probe of an incidence that the USFDA now demands. We are negatively surprised by Lupin’s inability to address the USFDA issues over the past 2 years. Tarapur is the 5th facility to be classified as OAI. This raises concerns on the systems and process and leader-ship in quality and manufacturing units.

Tarapur API site was commissioned in 1992 and is a multi-product site which includes a fermentation facility. The clearance of Goa and Indore formulation sites may not be sufficient to gain approval in cases where API is from Tarapur. But Tarapur API is not likely to have a material impact on US sales. But there could be some negative impact of third-party API sales. We think US sales uptick will depend on the ramp-up of Levothyroxine, Solosec, approval of gProAir and market share gains in some of the older products. We have a ‘buy’ rating and arrive at our TP of Rs 913 based on 22x September 2021F EPS of Rs 41.5.

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