Our analysis of Aurobindo’s Unit-IV 483 indicates that the observations can be viewed as ‘low to moderate’ in criticality and we believe these can be addressed by Aurobindo without major remediation.
Our analysis of Aurobindo’s Unit-IV 483 indicates that the observations can be viewed as ‘low to moderate’ in criticality and we believe these can be addressed by Aurobindo without major remediation. An escalation, although unlikely, will depend on management’s remediation plan. A large part of Aurobindo’s growth over the next two years is contingent on scale-up of injectable sales, with Unit-IV being a critical facility, accounting for 1/3rd of all pending ANDAs and 3/4th of all pending injectable ANDAs. Add on inexpensive valuations.
Form 483 issued to Unit-IV with 9 observations: After the inspection conducted at Unit-IV in February 2018, FDA has issued a 483 letter with nine observations. Our preliminary analysis indicates that these observations are ‘low to moderate’ in nature with no data integrity related issues or repeat observations. Importantly, the inspection did not result in any observations on the recent product recalls, potentially implying that the underlying issue in glass particle contamination has been satisfactorily addressed. The observations are related to cleaning of equipment (black stains in sterilised equipment), data capture and control processes, and potential of contamination in semifinished goods area (presence of a mosquito). We believe these issues can be addressed without undergoing any major remediation and view a warning letter as unlikely, though it will eventually depend on the company’s proposed corrective and preventive action plan. We believe facility approval is likely in 3-4 months, though, in the interim, approvals can be delayed.
Unit-IV critical for US growth: The Unit-IV is the most critical unit for Aurobindo with US revenue growth over the next two years largely contingent on approvals from this facility. While this unit currently accounts for only 10-12% of US sales, 37 out of 114 pending ANDAs are linked to this facility. Moreover, almost 75-80% of pending injectable ANDAs are filed from Unit IV and ramp-up of US injectable business hinges on clearance of this unit, though two key FY2019 launches namely ertapenem (filed from AuroNext) and vancomycin (already approved) remain largely unaffected. With FDA increasing focus on quality requirements, we believe investors’ attention over the next six months will continue to remain glued on regulatory outcomes particularly in the light of (i) Unit IV facing two FDA inspections over the past 10 months (ii) upcoming inspection at Unit XII and (iii) recent product recalls from Unit IV and Unit XII, though, we believe, these have been largely addressed by the management.
Valuation attractive though FDA issues to continue to be in limelight: ARBP currently trades at 13.5X FY2019e and 12.5X FY2020e EPS, which we believe is attractive, particularly considering that our estimates do not include any upside from products such as iron sucrose. Concurrently, we believe, investors’ focus will largely remain on regulatory inspections and outcomes. ADD.