Event to have a negative impact; TP and earnings under review; ‘Buy’ retained
Lupin announced on 16 March, 2019 that, following the inspection in December 2018, the Somerset facility in the US has been classified as “OAI” (Official Action Indicated). This implies that the USFDA is likely to take regulatory action which is likely to impact future approval from the site. The facility underwent a PAI (Prior Approval Inspection) in December, 2018 that led to six Form 483 observations, as per the company. The facility was part of the Gavis acquisition. The development is unexpected and is likely to have a negative stock reaction in the near term. The Somerset site contributes 22% of US revenues in FY19F, in our view.
The event raises concerns on the company’s ability to handle manufacturing-related regulatory issues: The OAI status for Somerset facility is an unexpected development. This follows the OAI classification for its Mandideep Unit 1 facility last week. Now, four of the company’s facilities are classified as OAI. The silver lining is that the key facilities from the perspective of new launches – Nagpur and Indore Unit 3—have successfully cleared FDA inspection recently. We also expect successful closure of Goa inspection in the near term. Nonetheless, we think the recent developments will raise investors’ concerns on the company’s ability to handle manufacturing-related regulatory issues. We are reviewing our earnings estimates and target price. Our 12-month TP of Rs 1,017/sh is based on 22x FY21F EPS of Rs 46.2.