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Gagillapur site under a cloud

USFDA classification is vital for new approvals

* Granules India (GRAN) was issued a Form 483 with six observations for its Gagillapur site after a recent USFDA inspection.

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

* GRAN is expected to implement remediation measures to address the issues. We await the classification of inspection from USFDA to understand the sustainability of compliance with regulatory guidelines.

* Currently, there is no major product pending for approval and is built into estimates from this site. We await clarity on the impact of remediation measures on the ongoing business.

* We expect a 36% earnings CAGR over FY24-26. We value GRAN at 18x 12M forward earnings to arrive at a TP of INR680. We reiterate our BUY rating on the stock.

Form 483 details

* Out of the six observations highlighted by USFDA, one is related to equipment and utensils not being appropriately cleaned.

* Certain air-purification filters and non-dedicated equipment are mentioned.

* The inspector cited certain examples about samples pre- and post-batch manufacturing and subsequent analysis.

* In another observation, the inspector has highlighted that investigations pertaining to out-of-specification (OOS) and out-of-trend (OOT) are not thorough. In this section, there is one repeat observation.

* One observation highlights the lack of oversight on control and document management.

* Another observation is related to quality checks during the production process.

* There is an observation with respect to in-process controls to be conducted on certain samples of in-process materials of each batch.

* Further, Form 483 highlighted concerns related to filters, air handling units, equipment cleaning skids and ducts.

Sound compliance track record till date

* Till date, GRAN has gone through 24 USFDA inspections since 2009. Out of 24 inspections, Gagillapur (Medchal-Malkhajgiri) has been inspected six times.

* With a sound regulatory track record, the company received either Voluntary Action Indicated (VAI) or No Action Indicated (NAI) classifications in these inspection.

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

* The management is working to address and resolve the issues raised by USFDA within the stipulated time.

Valuation and view

* GRAN has recorded a healthy 10% earnings CAGR over FY19-24. Given that GRAN is focusing on building a niche pipeline in the oncology space, largevolume products, innovative tech-based products and backward integration, we estimate a 36% earnings CAGR over FY24-26. However, the regulatory inspection at Gagillapur will be a near-term hurdle for growth in US markets, and GRAN is working on implementing remediation measures in this plant.

* We value GRAN at 18x 12M forward earnings to arrive at a TP of INR680. Reiterate BUY on the stock.

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