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MOSL: DIVI'S LABORATORIES (Neutral)-Risks remain, but management expects losses to be restricted-Unit-1 inspection results key

​DIVI'S LABORATORIES: Risks remain, but management expects losses to be restricted; Unit-1 inspection results key; buyback/special dividend as near-term triggers

(DIVI IN, Mkt Cap USD2.4b, INR623, TP INR600, 4% Downside, Neutral)

Key takeaways from our concall with DIVI’s management:

• Management expects revenue impact to be much lower: Although exposure to the US market from Unit-2 stands at ~22% of total sales, management expects revenue loss to be restricted to ~5% of total sales because of the exempted product list and an increase in supply to ex-US markets. We expect revenue loss of ~15%, given: 1) risk of import alert from smaller regulators (including Health Canada, which has already asked for additional information post the US FDA inspection); 2) risk of loss of business from existing clients; 3) restricted supply from Unit-2 products exempted list because of batch-by-batch testing requirement from third-party auditors.

• Unit-1 US FDA inspection is due: Unit-1 accounts for 35% of total revenue and its exposure to the US market stands at ~11% of total revenues. This plant was last inspected in June 2014, and an inspection is due over the coming few days. It will be critical for the company to come out clear in the USFDA inspection (particularly since the FDA had cited data integrity issues in Unit-2).

Negative news flow can continue in future: There are other regulators (like Health Canada) that rely on inspection results from the US FDA. This increases the risk that DIVI may face a supply ban from these regulators too (resulting in incremental loss of sales). Apart from this, there is a risk of market share loss for existing products and of clients (in EU and other geographies also) shifting business from this plant to peers