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Robust comprehensive plan key to resolve regulatory headwind
* The USFDA has issued a warning letter (WL) to Aurobindo Pharma (ARBP) based on the Corrective and Preventive Action (CAPA) submitted by the company to observations raised by the USFDA following an inspection conducted in Feb’19.
* The WL has indicated deviations related to Current Good Manufacturing Practices (CGMP) and equipment surface, which may impact the quality of APIs manufactured at ARBP’s site.
* We have lowered our P/E multiple to 11x (from 13x earlier) to factor in the delay in approvals for the site under WL and regulatory risk at other sites having Official Action Initiated (OAI).
* Accordingly, we have reduced our price target to INR720 (prior: INR840) on 12-month forward earnings basis. While ARBP continues to improve profitability in the EU business, its pending ANDA pipeline remains robust for the US market. It trades at 10x FY20E EPS of INR58 and 9x FY21E EPS of INR65. Maintain Buy.
Key highlights of the WL: CGMP Deviations
* There has been a failure to extend investigations to other batches that may have been associated with a specific failure or deviation.
* Particularly, the root cause analysis with respect to impurities in the API was deficient. The WL highlighted that the company has initiated recalls/additional process controls and testing of all manufactured batches of certain API, post the mention by regulatory agencies.
* There has been failure to ensure that equipment surface in contact with the API does not alter it beyond the established specification.
Failure to comply with submission of documents
* Changes to methods or controls were not reported to the USFDA through supplement for an approved product.
* Though the company has engaged a consultant to evaluate operations, the WL highlighted that the firm’s management will be responsible for fully resolving all deficiencies to ensure CGMP compliance. The WL also indicated that the USFDA has cited similar CGMP observations at other sites — Unit I and Unit IX.
As a response, the USFDA would require comprehensive measures to ensure adequate quality oversight of operations/equipment that could affect the drug quality, including any revised qualification and evaluation procedures.
The USFDA would also require an update on the CAPA plans already initiated by ARBP, in addition to a thorough review of all API batches made at ARBP sites, in terms of impurities above reported thresholds.
Valuation and view:
ARBP has indicated that its existing business will not be impacted due to the WL. However, we have reduced our P/E multiple to 11x (from 13x) to factor in (a) the regulatory risk at sites having OAI classification, and (b) the delay in approvals from sites under WL. Accordingly, we reduce our price target to INR720 (prior: INR840) on 12-month forward earnings basis. While ARBP continues to improve profitability in the EU business, its pending ANDA pipeline remains robust for the US market. It trades at 10x FY20E EPS of INR58 and 9x FY21E EPS of INR65. Maintain Buy
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