Robust CAPA required to resolve issues highlighted in WL. The USFDA had conducted an inspection at CIPLA’s Goa formulation site from Sept 19-27, 2019, and issued form 483 with 12 observations. It subsequently classified this inspection as official action indicated (OAI) in Jan’20. Recently, the USFDA issued a warning letter to this site, citing inadequate response to observations highlighted in form 483. This necessitates CIPLA to put in place robust corrective and preventive action (CAPA) and work on a detailed remediation plan to address cross-contamination issues, cleaning validation program, investigating deviations/OOS results and risk assessment of contamination hazards. Thereafter, the site will have to go through a re-inspection to ensure successful compliance, in our view. Goa plant contributes ~2.5% of total sales (10-12% of US sales) as a single-source facility. CIPLA has low-single-digit ANDAs pending for approval from this site over the near term. We lower the P/E multiple to 18x (prior: 20x) to factor in the regulatory concerns and revise our price target to Rs 440 on 12-month forward earnings. While CIPLA has a healthy ANDA pipeline for the US market and renewed its strategy to gradually improve growth in domestic formulation, the return ratios are yet to pick up meaningfully. Maintain ‘neutral’.

Post issuance of form 483 and reviewing CIPLA’s response on the observations, the USFDA classified the inspection at the Goa site as OAI. Thereafter, it has recently issued a warning letter to this site, highlighting inadequate response to form 483 and the lack of root cause analysis to fully resolve the cross-contamination problem. Moreover, it cited inadequate response to the issue related to HEPA filter integrity. At the same time, the USFDA acknowledged the company’s efforts to conduct new smoke studies and commitment to complete facility upgrades of sterile units. Also, it acknowledged CIPLA’s decision to suspend production at sterile units until remediating cGMP violations. Accordingly, the USFDA expects holistic remediation with specific CAPAs to resolve the issues.

Goa plant contributes 10-12% of US sales as a single-source facility. However, a large part of sales from this site could possibly be shifted to other sites in case the regulatory situation worsens. Low-single-digit ANDAs are pending for approval from this site over the next 12-15 months. In our view, this site could be re-inspected once the company addresses the concerns highlighted by the USFDA.

CIPLA is looking to improve synergies in the areas of distribution, portfolio and customer focus across prescription, trade generics and OTC category in the domestic formulation segment. It has 65 ANDAs pending for approval and continues to file 10-12 ANDAs annually for the US market. Accordingly, we expect 15% earnings CAGR over FY19-21. However, the return ratios are yet to improve meaningfully. We, thus, lower the P/E multiple to 18x (prior: 20x) 12-month forward earnings and arrive at a price target of Rs 440.