8 July 2016
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Pharma coverage universe
Dr. Reddy's Labs
In the last one year, the BSE Healthcare Index has underperformed the market index by
~10%, primarily on the back of concerns about regulatory scrutiny on key Indian pharma
players. The spate of FDA actions (regulatory) on Indian companies like SUNP, DRRD,
CDH and IPCA over the past 12 months has raised questions on manufacturing quality
standards followed by Indian companies.
Over the past few days, three Indian pharma companies (Lupin, Cadila and Alembic)
have received establishment inspection report (EIR) from the USFDA for inspections
carried out at their respective facilities (refer Exhibit 1). Although a negative outcome at
CDH’s Moraiya and LPC’s Goa facility still cannot be ruled out, the probability of it has
come down following these EIR reports.
Given that SUNP and DRRD have also completed remediation measures at their
respective plants (which received warning letters in FY16), we expect these plants too
to come out of the woods in FY17. We believe these positive regulatory outcomes (if
play through in FY17) will play a key role in rebuilding investor confidence and
strengthening sector multiples.
Although the July-15 inspection conducted by the USFDA at its Goa plant is formally closed
now, the company is yet to receive the closure report for the nine 483 observations issued
by USFDA at the same plant post its inspection in Mar-16. We see lower probability of any
negative outcome at the Goa facility as concerns related to repeat observations are
behind us. The Goa facility is critical for LPC as it accounts for ~40% of current US sales and
30% of pending pipeline.
Lupin – step in the right direction
Cadila – old 483s closed; resolution of warning letter pending
CDH received EIR, resulting in the closure of inspection points (483s) raised based on the
inspection carried out between Aug-14 and Sep-14. The plant is still under warning letter
status. However, the company is seeing this as a positive step. CDH has already completed
the remediation process and informed USFDA about the steps it has taken. Early resolution
is critical, given that Moraiya remains one of the key facilities for CDH with 60% of US sales.
Also, resolution of this facility is critical for the Asacol HD FTF launch. CDH expects to retain
exclusivity on Asacol HD and has the option to launch AG by July-16 (if it does not receive
approval). However, the AG launch will result in lower margins as the company will have to
share profits with the innovator.
Alembic – clearance of Panelav formulations facility critical
Alembic announced today that it has received EIR from the USFDA for the inspection
carried out at the Karkhadi API plant in Apr-15. Also, the other two API facilities located in
Panelav were successfully inspected in Jun-16 and did not receive any form of 483
observations. 483 observations (4 observations) received at the Panelav facility are still
open as of now. Alembic has already stated that observations are non-critical in nature and
involve no data integrity issues (also received product approvals from this plant post
(Kumar.Saurabh@MotilalOswal.com); +91 22 3982 5584
8 July 2016
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