Lupin Rating: Neutral- USFDA clearance for Goa unit removes overhang

After almost 4.5 years of regulatory hurdles, LPC received a favourable classification (Voluntary Action Indicated or VAI) for its Goa facility from the USFDA. This is a big relief from a compliance standpoint, given the reasonable contribution in the base business as well as double digit ANDAs pending approval from the Goa site. We expect 21% earnings CAGR over FY21-23e and raise our 12-month forward P/E to 25x (to factor in Goa compliance) from 24x earlier and arrive at our TP of Rs 990/share. While the regulatory clearance removes a key overhang on the Goa facility, we maintain our Neutral rating as valuation leaves limited upside from current levels.

Goa regulatory background
LPC’s Goa site regulatory history was sound till USFDA issued a Warning Letter to this site after its Apr’17 inspection. The key observations cited by USFDA in its Warning Letter were frequent invalidation of initial Out of specification (OOS) results without adequate investigation. Subsequently, the site was again inspected in Feb’19 and was classified as Official Action Indicated (OAI). In fact, the inspection conducted in Sep’21 highlighted a similar observation.

The recent VAI classification by USFDA implies enhanced remediation measures implemented by LPC to resolve issues indicated by USFDA. The ‘OOS’ related observation has been cited by USFDA at other sites of LPC as well. VAI at the Goa site implies steps taken by the management to resolve this issue were adequate. This would accelerate the efforts to resolve issues at other sites as well.

Other inspection updates
LPC’s Mandideep Unit 1 was inspected in Dec’18, after which the facility was issued a Warning Letter in Sep’19. No ANDA is pending approval from this site. Its Indore (Pithampur Unit 2) plant was inspected in May’17. Subsequently, it received a Warning Letter. It was inspected again in Jan’19 and was classified as OAI. Pithampur Unit 2 received six observations during the Jan’19 inspections. On the positive side, key product Albuterol is being produced at the Nagpur facility and has an EIR in place. This limits the downside on current revenue.

Valuation and view
We expect LPC to record 21% earnings CAGR over FY21-23E, led by: (i) ramp-up in the market share of g-Proair/g-Brovana, (ii) new launches in US Generics, and (iii) improved outlook for DF, especially Chronic Therapies. There could be headwinds related to raw material and logistics cost over the near term as witnessed across the industry. We arrive at our TP of `990/share and maintain Neutral rating as current valuations adequately factor in healthy earnings CAGR as well as a favourable regulatory outcome.