22 November 2019
Update | Sector: Healthcare
TP: INR500 (+17%)
Deficiency in injectables manufacturing controls
Robust CAPA required to resolve issues
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
12M Avg Val (INR M)
Free float (%)
251.2 / 3.5
838 / 390
Financials Snapshot (INR b)
Highlights of Unit 4 form 483
The USFDA inspected Aurobindo Pharma’s (ARBP) Unit 4 from 4 -13 Nov’19 and
issued form 483 with 14 observations.
Observations are largely related to deficiencies in studies and monitoring conditions
necessary for aseptic processing/injectable facility. It would take 4-6 months of
enhanced efforts to resolve the issues, in our view. Unit 4 accounts for 7-8% of US
sales and has 47 ANDAs pending for approval.
Despite intensifying regulatory headwinds over the past 8-9 months, ARBP has been
able to maintain growth momentum in US generics (+27% YoY in 1HFY20) on the back
of new launches and acquisitions. Further, it has a healthy pipeline of 153 ANDAs
pending for approval in US generics. Separately, EU business profitability is on track
owing to its foray into newer markets and shift in product manufacturing to India.
We value ARBP at 8x 12M forward earnings and arrive at a target price of INR500.
Shareholding pattern (%)
Sep-19 Jun-19 Sep-18
FII Includes depository receipts
Stock Performance (1-year)
Sensex - Rebased
The USFDA inspected Unit 4 as part of cGMP compliance and thereafter issued
form 483 with 14 observations (this site has successfully closed inspection six times
in the past). The inspector observed deficiencies in media fill studies representing
the manufacturing process. Other notable observations were (a) sampling plan not
representing worst-case activities and (b) deficiency in systems for maintaining any
equipment used to control aseptic conditions. All these observations showed
deficiency in the assuring aseptic processes in the manufacture of sterile products.
A robust response followed by the implementation of CAPA would be required to
resolve these issues within the 3-6 month timeframe. The USFDA also indicated (a)
deviations in sterility testing, (b) higher number of days taken to submit field alert
report, (c) need for comprehensive review of RM, (d) deficiency in investigation of
excursions, (e) the lack of evaluation of alarmed events, (f) insufficient
documentation, (g) inadequate training and (h) deficiency in design document.
Regulatory risk has intensified over past one year
Over the past one year, eight sites have been inspected by the USFDA. Units 1 and
11 have been classified as Official Action Indicated (OAI) and Unit 9 has been issued
a warning letter recently. Unit 7 is issued form 483 with seven observations. Units 5
and 8 were issued form 483 with four observations each.
Unit-4 contributes ~7-8% of US sales
Auromedics comprises injectables from Unit 4, Eugia, Unit 12, Unit 16 and
Auronext. It formed ~19% of US sales at end-2QFY20. Excluding sales from Eugia,
Units 12/16 and Auronext, Unit 4 would form ~7-8% of USD1.5b US annual sales.
Unit 4 has 63 ANDAs approved till date and 47 await final approval.
Valuation and view
Regulatory risk has increased with escalation to OAI/WL at a few sites. However,
US generics growth for ARBP is improving due to new launches/acquisitions.
Further, EU (30% of sales) is penetrating into newer markets and improving
margins by shifting manufacturing to India. We value ARBP at 8x 12MF earnings
(40% discount to three-year average) and arrive at a TP of INR500. Maintain
Tushar Manudhane – Research analyst
(Tushar.Manudhane@MotilalOswal.com); +91 022 6129 1536
Hitakshi Chandrani – Research analyst
(Hitakshi.Chandrani@motilaloswal.com); +91 22 6129 1557
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