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OAI at Gagillapur breaks the sound compliance track record

Limited approvals pending from Gagillapur offer some respite

* USFDA classified Granules India’s (GRAN) gagillapur site as Official Action Indicated (OAI) following the recent inspection.

* OAI implies that the remediation measures have some lacuna in addressing issues highlighted by USFDA.

* Having said that, there are only three ANDAs pending for approval. Additionally, with the OAI classification, GRAN can continue to supply the approved products.

* The temporary disruption in production due to the implementation of remediation measures is already built into our FY25 estimates.

* GRAN is not only diversifying its formulation manufacturing capacity at Vizag/Genome Valley/Virginia but also building capabilities to manufacture products in oncology as well as utilizing differentiated technologies such as MUPS.

* We expect a 29% earnings CAGR over FY25-27, driven by a) building a niche pipeline in oncology and innovative tech-based products; b) large volume products; and c) backward integration. We lower the PE multiple from 20x to 18x to factor in the escalation of the regulatory issue and arrive at a TP of INR625. Reiterate BUY.

OAI at Gagillapur to impact new approvals while base business continues

* GRAN was issued a form 483 with six observations for its Gagillapur site after the USFDA inspection on Sept’24.

* The observations were related to cleaning/maintenance, inadequate rootcause analysis, document management, procedures for in-process controls, and air purification units.

* The USFDA has now classified the inspection as OAI.

* The company has only three products pending approval from this site.

* It has responded to all the observations issued by the USFDA.

* To remediate the facility, GRAN has voluntarily paused the manufacturing and distribution at the site. It has also employed an independent third-party consultant for the site's cleaning protocols and cross-contamination controls.

* To date, GRAN has gone through 24 USFDA inspections since 2009. Out of 24 inspections, Gagillapur (Medchal-Malkhajgiri) has been inspected six times. All the inspections received either Voluntary Action Indicated (VAI) or No Action Indicated (NAI) classifications.

De-risking/adding new capabilities/capacities

* The Gagillapur site has a 24k TPA of PFI and 21.6b PA of formulation capacity, which is higher than the combined capacity of Parawada, Chantilly, and Jeedimetla.

* Further, to de-risk the facility, GRAN has commercialized the new 2.5b formulation capacity at Genome Valley and filed new complex products, such as CNS, ADHD, and other products. An additional capacity of 5.5b from Genome Valley is expected to come online by FY26 to support growth.

* Furthermore, GRAN is launching new oncology products from Vizag plants in the near term.

Limited impact on financials

* Post the form 483 issuance by the USFDA on the Gagillapur site, GRAN temporarily paused the production and distribution at this site. This affected revenue and profitability in 2QFY25.

* This impact would also be carried forward in 3QFY25, led by the gradual rampup of the plant.

* While GRAN is implementing remediation measures at the plant, it is also filing niche products from alternate sites such as Genome Valley and Vizag, which would offset the impact.

* As such, we have already factored in the impact of classification and remediation measures at the Gagillapur plant in FY25.

Valuation and view

* GRAN has recorded a healthy 10% earnings CAGR over FY19-24. Given GRAN’s focus on building a niche pipeline in the oncology space, large-volume products, innovative tech-based products, and backward integration, we estimate a 29% earnings CAGR over FY25-27. However, the regulatory inspection at Gagillapur will be a near-term hurdle for growth in the US markets, and GRAN is working on implementing remediation measures in this plant.

* We await further clarity on the business prospects following the OAI classification at Gagillapur.

* We lower the PE multiple from 20x to 18x to factor in the escalation of the regulatory issue and arrive at a TP of INR625. Reiterate BUY.

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