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Aurobindo Pharma: Stock has factored in import alert

Kotak Institutional Equities

Assuming worst-case scenario, ARBP announced that the USFDA issued a form-483 for its Unit-VII, its largest orals facility for the US, though, increasingly less relevant for future pipeline/filings, particularly, post Sandoz deal closure.

As per the company, the 483 had no data integrity related issues, and while we await the 483 document, we note that as per unauthenticated media reports OOS deficiencies is one of the observations. Post sharp-20% correction, the stock is already factoring in an import alert, with the risk/reward now favourable. We await the 483 before changing our estimates/ fair value.

News of form-483 on Unit-VII sends stock down 20%. Unit-VII is a critical facility for ARBP's current US business, accounting for ~20% of US sales, though, it is getting less relevant for future growth, with the facility having only 33 ANDA's pending approval (including 14 tentative, several of which are PEPFAR filings).

While we are yet to access the form-483, as per the company, there are no data integrity issues identified in the 483.

However, as per unauthenticated media reports, the first observation highlights issues pertaining to out-of-specification (OOS) testing. OOS testing has been a key area of focus for the USFDA, and was one of the key issues identified in the recent OAI/warning letters issued to peers such as Lupin, with "investigation deficiencies" being the highest cited category in 483's issued globally over FY2016-18. The focus on investigation deficiencies also follows from the USFDA's framework of for-cause and surveillance inspections, and is likely to continue to remain a key area of focus.

Sandoz portfolio evolution a key sensitivity to numbers, though, ignored for now. We expect Sandoz acquisition to close in Q3FY20, and see the evolution of Sandoz portfolio and pipeline as a key sensitivity for ARBP, with the acquisition also adding three facilities, potentially helping ARBP diversify its manufacturing network (or gain synergies).

Sandoz' top-10 products accounted for ~40% of sales in the oral solids bucket, including one >$100-m product (levothyroxine); three $50-60-m products including penicillin franchise, potassium chloride, as well as two AGs (Focalin XR and Adderall XR); and several products in the $15-20-m bucket.