EUR 120.00 For Business Accounts Only

MOSL: AUROBINDO PHARMA (Buy)-Observations at Unit 12 resolvable on robust CAPA

(ARBP IN, Mkt Cap USD3.7b, CMP INR450, TP INR530, 18% Upside, Buy)

** The USFDA inspected Aurobindo Pharma’s (ARBP) Unit 12 from 10th to 21th Feb’20 and issued form 483 with six observations. The regulator has pointed out microbiological contamination, lack of training, inadequate analysis of out-of-specifications, and deficiency in handling of complaints, among others. We believe that these issues are resolvable on undertaking robust actions for 3-6 months.

** There are no ANDAs pending for approval from this site. Further, most existing products at Unit 12 are also approved to be manufactured in Unit 16. Unit 12 accounts for 3-4% of US sales as a single-source facility, in our view.

** We remain positive on ARBP and expect 15% earnings CAGR over FY19-22, led by its robust ANDA pipeline and addition of the Sandoz business. However, increasing regulatory concerns (primarily after revocation of Unit 4 classification) prompt us to cut our P/E multiple to 8x (prior: 9x) and revise our TP to INR530.

Highlights of Unit 12 form 483
The USFDA inspected ARBP’s Unit 12 as part of cGMP compliance and issued form 483 with six observations: (1) Inadequate measures to prevent contamination of environment, equipment and product by personnel or environmental condition, which could potentially affect product quality. Specific remarks were made on flow of materials, qualification of clean rooms and procedure to control operator access to clean rooms. (2) Procedures to prevent microbial contamination not established. (3) Lack of education/training. (4) Inadequate root cause analysis for reported out-of-specifications. (5) Issues with handling of complaints. (6) Non-establishment of sensitivity of test methods. We expect these issues to be resolved within 3-6 months post robust CAPA. Note that this site was last inspected in Mar’18 and classified as VAI.