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USFDA issues seven observations to the Goa site

Work-in-progress to address regulatory issues

* The recent conclusion of inspection at LPC’s Goa site led to the issuance of Form 483 with seven observations. The site has been under the regulatory lens since Mar’17 after a warning letter was issued by the USFDA. This has impacted new approvals from this site. The classification of this inspection and timeline to resolve the issues raised by USFDA is a critical aspect to watch out for revival in new approvals from this site.

* The management’s focus continues towards resolving regulatory issues at its five sites under warning letters (WL)/official action indicated (OAI).

* Our earnings estimates remain unchanged with the issuance of Form 483 on the Goa site. Its potential inhaler products are on track for approval and are from an USFDA compliant site. However, its asset turn remains impacted due to lack of approval from sites under the regulatory cloud. We maintain our Neutral rating on LPC.

LPC’s Goa site receives seven observations after the USFDA’s inspection

* The USFDA inspected LPC’s Goa site from 6th Sep’21 to 18th Sep’21 and has issued seven observations. It had first inspected this facility in Apr’17 and issued a WL, citing violations to good manufacturing practices for finished pharmaceuticals. The site was later re-inspected in Feb’19 and was issued a Form 483 with two observations. The inspection was classified as OAI by USFDA. Post that, LPC had implemented remediation measures to address the regulatory issues at this site.

Enhanced effort required to resolve the regulatory headwind

* In Jun’21, LPC had received a WL for its Somerset facility in the US. LPC’s Somerset facility was first inspected in Dec’18. The facility was subsequently issued an OAI in Mar’19. With the easing of the COVID-led lockdown, LPC again faced an inspection at this site in Sep’20. The USFDA issued a Form 483 with 13 observations to this site. Post inspection and due to inadequate remediation, LPC was issued a WL for the Somerset facility in Jun’21.

* LPC’s Mandideep Unit 1 was inspected in Dec’18, after which the facility was issued a WL in Sep’19. Its Pithampur Unit 2 was inspected in May’17. Subsequently, it received a WL for Pithampur Unit 2. It was inspected once again in Feb’19 and issued a Form 483 with six observations. The current OAI classification to Pithampur Unit 2 implies that the remediation measures are unsatisfactory. The management has since implemented further measures to address the concerns raised by the USFDA. These headwinds have led to a reduction in commercial benefits, thereby impacting return on investment.

Valuation and view

We expect 26% earnings CAGR over FY21-23E, led by a 14%/15% sales CAGR in the US/Domestic Formulation market. The latter is supported by a 240bp margin expansion, which is largely attributable to inhaler launches (g-Brovana/g-Fostair in UK) and higher traction in existing commercialized niche products (g-ProAir). Ongoing regulatory challenges continue to weigh on LPC’s new product approvals for the US and fail to counter the heightened price erosion in the US base business, especially in g-Famotidine. We value LPC at 24x 12-month forward earnings to arrive at our TP of INR1,040. We maintain our Neutral rating as the current valuation adequately factors in potential earnings growth over the next two years and provides limited upside from current levels.

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