MOSL: AUROBINDO PHARMA (Buy)-Unit 4 observations out-Risk of warning letter minimal

​Aurobindo Pharma: Unit 4 observations out: Risk of warning letter minimal

(ARBP IN, Mkt Cap USD6.0b, CMP INR596, TP INR900, 51% Upside, Buy)

• Approvals from Unit 4 may get delayed by six months: Aurobindo's Unit 4 facility was inspected by the USFDA in April 2017. The observation letter is out - although there are no data integrity issues, remediation requires infra repair, change in equipment, training, etc. We do not see a risk of warning letter, but believe that approvals from this facility may get delayed by six months.
  
• Key injectables facility: Injectables sales to the US are estimated at ~USD150m in FY17, of which this plant would account for ~USD100-110m (4.5% of sales). This plant accounts for about 35 of the 40 total pending injectables ANDAs.
  
• Impact of delay in approvals already priced in: For FY18E, we had built in US sales of ~USD225m from injectables (v/s USD150m in FY17E). Assuming six months of delay in approvals from Unit 4, sales loss would be USD45m @ 35% EBITDA margins (v/s consol. margins of ~23.5%). In worst case, the impact of delayed approvals on FY18 PAT will be ~2.5%.
  
• Unit 3 facility out of woods: On 5 May 2017, ARBP received ANDA approval for Lamivudine and Zidovudine oral tablets from the Unit-3 oral formulations facility (~USD200m sales; ~20% of US sales; 8.5% of total sales). This plant was inspected in April 2017 and received six 483 observations, all of which were procedural in nature. This puts to rest concerns about any negative outcome from this facility.