8 July 2016
Healthcare
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Pharma coverage universe
Company
Sun Pharma
Lupin
Dr. Reddy's Labs
Cipla
Aurobindo
Cadila Healthcare
Divi's Labs
Glenmark Pharma
Torrent Pharma
Alkem
Alembic Pharma
IPCA Labs
Biocon
Granules India
GSK Pharma
Sanofi India
TP
(INR)
925
2,000
3,200
540
1,100
380
1,180
900
1,800
1,700
640
525
490
160
3,150
4,900
%
Upside
19
22
-10
4
42
6
6
7
27
25
7
12
-33
12
-10
7
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
inspections).
Kumar Saurabh
(Kumar.Saurabh@MotilalOswal.com); +91 22 3982 5584
8 July 2016
Investors are advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on
www.motilaloswal.com/Institutional-Equities,
Bloomberg, Thomson Reuters, Factset and S&P Capital.

Nature of compliance deviation more critical than number of Form 483
observations
Our analysis suggests that the instances of Form 483 issuances in a cGMP
inspection by USFDA are fairly common. Indian companies tend to have higher
cases of Form 483 issuances. However, very few of them translate into adverse
action by US FDA, implying that remediation for most cases is fairly achievable.
Therefore, it is pertinent to understand the nature of compliance gaps and to
assess whether there can be timely remediation or not.
Form 483 is simply a record of observed deviations, as noted by FDA
investigators immediately after completion of an audit. Establishment of strong
quality enforcement culture and reporting in a company ensures timely and
satisfactory resolution to the Form 483 observations, resulting in no business
impact. Fallout of an adverse regulatory action is increased investment on
quality systems as well as higher awareness within the company, which helps it
handle future inspections effectively.
Regulatory action not specifically directed at Indian companies alone
India has the second highest number of USFDA approved drug manufacturing
facilities at ~350 (after US) and hence the relevance of Indian facilities is high in
the global context. Inspections of Indian facilities have more than doubled in
2015 compared to 2009 (~110 in 2015 vs ~50 in 2009). However, even global
companies have come under the radar during the same period, implying that
the issue is structural and directly proportional to scale of operations for the US
market. Between 2010 and 2014, the USFDA has imposed 87 adverse regulatory
actions (warning letter, import alerts) for cGMP violations, of which 23% pertain
to Indian companies (versus 23% volume share).
Exhibit 1: Three companies received EIR issued by USFDA
Company name
Alembic
Cadila
Lupin
Facility
Karkhadi
Moraiya
Goa
Plant type
API
Formulations
Formulations
Inspection Time
Apr-15
Sep-14
Jul-15
Source: Company, MOSL
Exhibit 2: 483 Observations at Lupin’s Goa facility post Mar-16 inspections
Formulation unit
1: Invalidating OOS and retesting without any scientific basis
2: Cleaning to prevent cross contamination not performed as written procedure
3: Cleaning records don't match observed data
4: Procedures for cleaning and maintenance are deficient
5: Control procedures not established to monitor output and validate performance
6: Procedures to prevent contamination not followed
7: Written procedures for process control inadequate
8: Building not maintained in clean and sanitary condition
9: Disposal of trash not done in safe manner
Source: Company, MOSL
8 July 2016
2

Exhibit 3: Lupin- Result of last US FDA inspection across facilities
Plant Locations
Aurangabad, India
Dabhasa, India
GOA, India
Pithampur (3 Units), India
Mandideep, India
Nagpur, India
Gavis facility
Tarapur, India
Baltimore, USA
Type
Formulations
APIs
Formulations
BOTH
BOTH
Formulations
Formulations
API
Last Inspected
1/15/2016
NA
Mar-2016
1/23/2015
2/19/2016
NA
NA
2/23/2009
5/23/2014
483 Issued?
Y
Y
Source: Company, MOSL
Exhibit 4: US FDA Inspections (Drug Quality Assurance)
INDIA
No. of Inspections
150
100
50
0
91
52
62
137
100
88
Trend
112
2000
1500 1064
1000
500
0
U.S.
No. of Inspections
1454 1518 1410
Trend
800
1080 971
600
753
400
200
0
312
314
431
ROW
No. of Inspections
480
Trend
618
373
458
Source: US-FDA
Exhibit 5: India consistently garnering high share of ANDA approvals
Final approvals for indian players
Indian approvals as percentage of total approvals
250
200
150
100
50
0
76
111
126
126
130
28%
21%
155
201
165
130
130
29%
30%
31%
35%
40%
43%
34%
36%
50%
40%
30%
20%
10%
0%
Source: CRISIL, US FDA
8 July 2016
3

Exhibit 6: Past US FDA enforcement action on Indian companies
Company
Lupin
Lupin
Natco
Natco
Cadila
Cadila
Sun pharma
Dr. Reddy's
Dr. Reddy's
Dr. Reddy's
IPCA Labs
IPCA Labs
Sun Pharma
IPCA Labs
Ranbaxy
Ranbaxy
Strides Arcolab
Wockhardt
Jubilant Life Science
Dr. Reddy's
Cadila
Aurobindo
Aurobindo
Sun Pharma
Ranbaxy
Sun Pharma
Lupin
Cipla
Ranbaxy
Taro Pharma
Ranbaxy
Ranbaxy
FDA Action
Form ‘483
Form ‘483
Form ‘483
Form ‘483
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Warning Letter
Import Alert
Import Alert
Import Alert
Import Alert
Ban
Import Alert
Warning Letter
Import Alert
Warning Letter
Import Alert
Warning Letter
Warning Letter
Import Alert
Warning Letter
Warning Letter
Product Seizure
Warning Letter
Form '483
AIP
Warning Letter
Warning Letter
Import Alert
Unit
Goa
Mandideep
Chennai
Hyderabad
Ahmedabad
Moraiya
Halol
Srikakulam, AP
Miryalaguda, TL
Visakhapatnam, AP
Silvassa, Gujrat
Pithampur, MP
Karkhadi, Gujarat
Ratlam, MP
Taonsa
Mohali
Bangalore
Waluj, India
Canada
Mexico
Moraiya
Unit III
Unit VI
Able Labs
Ohm Labs
Michigan, Caraco
Mandideep
Bangalore
Paonta Sahib
Brampton, Canada
Batamandi
Dewas
Nature of
facility
Formulations
Formulations & API
API
Formulations
API
Formulations
Formulations
API
API
Formulations
Formulations
Formulations
API
API
API
Formulations
Injectable
Formulations
Formulations
API
Formulations
Formulations
Formulations
Formulations
Formulations
Formulations
API
Formulations
Formulations
API
Formulations
Date of
action
11-Mar-2016
19-Feb-2016
Mar-2016
Feb-2016
31-Dec-2015
31-Dec-2015
19-Dec-2015
6-Nov-15
6-Nov-15
6-Nov-15
25-Mar-15
25-Mar-15
13-Mar-14
23-Jan-15
24-Jan-14
13-Sep-13
11-Sep-13
24-May-13
27-Feb-13
6-Jul-11
6-Jun-11
23-May-11
27-Feb-11
31-Aug-10
24-Dec-09
26-Jun-09
14-May-09
20-Apr-09
26-Feb-09
5-Feb-09
17-Sep-08
17-Sep-08
Date of
resolution
x
1Q FY17
x
x
x
x
X
x
x
x
x
x
x
x
x
x
x
x
x
27-Jul-12
17-Jul-12
4-Jun-12
28-Mar-13
19-Sep-11
x
28-Aug-12
20-Jan-10
31-Aug-09
x
25-Apr-11
x
x
Resolution in
(months)
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
12.9
13.6
12.6
25.3
12.8
NA
38.6
8.4
4.4
NA
27.0
NA
NA
Source: Company, MOSL
Exhibit 7: Comparative valuation
Company
Sun Pharma
Lupin
Dr. Reddy's
Cipla
Aurobindo
Cadila
Divi's Labs
Glenmark
Torrent
Alkem
Alembic
IPCA Labs
Biocon
Granules
GSK Pharma
Sanofi India
CMP
(INR)
777
1635
3562
521
777
360
1118
838
1422
1363
598
469
727
143
3482
4593
FY16
Rating
Buy
Buy
Neutral
Neutral
Buy
Buy
Neutral
Neutral
Buy
Buy
Neutral
Neutral
Sell
Buy
Neutral
Buy
18.7
49.9
132.3
18.8
33.3
14.8
39.1
24.9
59.3
62.3
38.2
10.9
23.2
5.5
44.2
103.2
FY17E
EPS
32.7
64.1
147.8
24.1
43.3
15.2
46.8
43.1
70.6
70.7
25.2
24.0
26.2
6.8
62.9
148.4
FY18E
39.0
80.0
177.5
30.1
54.8
21.0
57.3
48.8
89.9
87.5
32.0
35.0
30.6
9.7
78.8
175.4
FY16E
41.5
32.8
26.9
27.8
23.3
24.3
28.6
33.7
24.0
21.9
15.7
42.9
31.3
26.2
78.8
44.5
FY17E
P/E
23.8
25.5
24.1
21.7
17.9
23.7
23.9
19.5
20.2
19.3
23.7
19.5
27.7
21.1
55.3
31.0
FY18
19.9
20.4
20.1
17.3
14.2
17.1
19.5
17.2
15.8
15.6
18.7
13.4
23.8
14.7
44.2
26.2
FY16
FY17E FY18E
EV/EBITDA
25.1
17.4
14.3
26.2
18.6
15.1
13.9
13.3
10.7
17.7
12.7
9.8
13.0
10.4
8.2
14.3
14.7
10.5
18.6
15.0
12.1
16.9
9.0
8.1
8.3
13.6
10.9
17.7
14.9
11.5
11.3
17.3
13.1
21.2
13.2
9.8
12.3
10.2
8.4
10.7
8.7
6.6
56.2
38.1
29.9
18.8
15.1
13.3
FY16
FY17E FY18E
RoE (%)
17.5
21.7
24.0
22.6
23.6
24.0
14.2
14.7
16.1
11.0
11.7
13.1
32.1
30.9
29.4
31.7
26.2
29.2
27.4
28.2
29.4
16.4
21.3
18.8
34.1
31.6
32.4
22.4
21.2
22.1
38.8
26.8
27.7
6.1
12.5
16.1
11.9
12.3
13.0
21.6
19.4
21.7
22.1
34.4
43.5
14.2
18.5
19.5
Source: Company, MOSL
4
8 July 2016

NOTES
8 July 2016
5

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