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Regulatory woes intensify at Roorkee

* The USFDA recently issued an Import Alert at Jubilant Pharmova (JP)’s Roorkee facility, escalating the regulatory concerns at the site.

* This implies JP would have to implement considerable remediation measures to achieve successful compliance.

* The exemption of certain products despite the Import Alert will have limited the impact on the US Generics business.

* We have tweaked our estimates for FY22/FY23E to reflect the impact of the Import Alert at the Roorkee plant – we have considered the impact to be ~3% of FY21 sales. However, we remain positive on JP on the back of a) post-COVID recovery in the high-margin Radiopharma business, b) a strong order book in CDMO, and c) the expansion potential of Ruby-fill in Europe and the US, supported by a positive litigation outcome. We maintain our BUY rating on JP, with Target Price of INR920.

Regulatory background at Roorkee

* The dosage formulations plant at Roorkee was inspected by the USFDA in 2018 and was issued Form 483 with four observations. Subsequently, it was classified as Official Action Indicated (OAI) in Dec’18. JP was then issued a Warning Letter by the USFDA on the Roorkee facility in Mar’19.

* Post the completion of remediation measures, the site was re-inspected in Mar’21, which once again resulted in the USFDA issuing Form 483 with singledigit observations. Recently, the USFDA issued an Import Alert at the facility citing inadequate remediation measures related to compliance.

Business impact minimal despite import alert

* The USFDA has granted exemption to certain products from the Import Alert list, subject to JP meeting some conditions. The products that have been exempted include Meclizine tablets, Olanzapine orally disintegrating tablets, Risperidone orally disintegrating tablets, Spironolactone tablets, and Valsartan tablets. With these exceptions, the products that come under the ambit of the Import Alert accounted for ~3% of the total sales in FY21.

* JP has two facilities, one each in Salisbury (US) and Roorkee (India), which manufacture products for the generics markets. The overall Generics segment accounted for ~24% of total sales for JP in FY21. The US is the biggest geography for JP’s Generics business, with Europe, Canada, Asia, the Middle East, and LatAm being the other important markets.

* Of the 37 ANDAs pending approval, the majority have been filed from Roorkee. New approvals had already been impacted since the OAI classification in Dec’18. The Import Alert would further delay new approvals from this facility.

Valuation and view

We have tweaked our estimates for FY22/FY23E to reflect the impact of the Import Alert at the Roorkee plant. We expect an 11% CAGR in Radiopharma sales and 8% CAGR in CDMO (adjusted for one-time sales of COVID products in FY21) over FY21–23. Thus, we expect a 10% earnings CAGR over FY21–23. We maintain BUY on the stock, with TP of INR920 (valued at 9x 12M forward EV/EBITDA).

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