Published on 5/11/2019 11:52:48 AM | Source: Reliance Securities Ltd

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US FDA Issues Warning Letter to Moraiya Facility

The US FDA has issued a warning letter (WL) to Cadila Healthcare’s (CDH) Moraiya (Gujarat) OSD and sterile injectable facility, based on the Corrective & Preventive Action (CAPA) submitted by CDH to the observations made by the regulator. The inspection was conducted between 22nd of April and 3rd of May following, which the US FDA issued 14 observations relating to cleaning validation, OOS and product contamination. As per the company, there were no repeat observations or Data Integrity related observations. Subsequently, the US FDA accorded Moraiya facility as OAI (Official Action Indicated) status in Aug’19. Moraiya is an important facility for CDH, as it contributes ~50% to its US sales and total of 1/3rd of pending pipeline (32 ANDAs). Notably, we have not factored in any new launches from this unit in our valuation model.


Moraiya – Key Facility & Largest Contributor to CDH’s US Sales

The US business contributes ~40% to CDH’s total sales, while Moraiya is an important facility for the Company, as it contributes ~50% to its US sales and accounts for one-third of its ANDA pipeline (32 ANDAs pending for approvals). Notably, CDH also received WL for Moraiya unit in Dec’15, which was successfully resolved in Feb’17, post which the facility faced US FDA inspections few times but with zero observations. It is pertinent to note that CDH has successfully completed US FDA inspection for Baddi (formulations) and API plants (Ankleshwar and Dabhasa) post Form-483 for Moraiya. CDH has been site transferring key injectable to its Liva and Alidac plants due to regulatory issues at Moraiya. Owing to WL, we don’t expect any new approval from the facility (32 ANDAs pending) till the facility gets regulatory clearance. We have already factored WL impact (lack new approvals) into our valuation model in 1QFY20 only. According to the Management, the remediation efforts for Moraiya unit are not likely to have any significant impact on CDH’s product supplies to the US.


Domestic Formulations Biz – Recovery on the Cards

CDH’s domestic formulations business has reported slower growth vs. IPM in last 3 years owing to New Pricing Policy, ban on FDCs, GST roll-out and discontinuation of 2 brands. CDH has been working on rationalisation of product portfolio, restructuring of field force/therapies and reallocation of resources (territories) since 3QFY19, which we believe to have long-term positive impact on its business. CDH is expected to maintain its focus on key therapeutic segments (Gynaecology//Respiratory/NSAID/CVS/GI), while focussing on super specialty therapies (Oncology/Vaccines), going ahead. We envisage CDH’s revenue from domestic formulations business to clock 11% CAGR over FY19-21E led by new launches and volume growth.


Outlook & Valuation

Issue of WL is on expected lines, as the facility has already been accorded with OAI status (observations related to cleaning validation/OOS). While we already factored in the impact of WL into our valuation model in 1QFY20, we expect CDH to deliver muted growth in the US owing to pending regulatory issues, going forward. At CMP, the stock trades at 14.5x and 12.0x of FY20E and FY21E earnings (1-Yr fwd 3-yr historical avg PE @21.8x), which offers attractive risk-reward for the stock. The stock has already been corrected by 24% since the issue of Form-483 for Moraiya. We maintain our BUY recommendation on the stock with a Target Price of Rs300.


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