Buy Aurobindo Pharma - FDA import alert: A sentimental dampener; Edelweiss,

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Aurobindo Pharma (ARBP IN, INR 166, Buy)

n  FDA issues import alert on Unit VI facility (Cephalosporin block)

The FDA has imposed an import alert on Aurobindo Pharma’s (ARBP) Unit VI following deviations observed during an inspection in December 2010. The unit  (A&B block) manufactures Cephalosporin API as well as formulations (sterile and oral). Under the import alert, the company will not be able to ship any products to the US from the unit nor will it get new approval filed out of it. Management has indicated that though it has not received any official communication from the FDA, ARBP is committed to its US operations and expects resolution of the issue in the next three-four months. Historically, the company has had a good track record with FDA and had not been issued any warning letter or import alert for any of its facility.

n  Import alert to have limited financial impact (8-7% of earnings)

The company earns USD 35 mn (3% of FY12E sales) in the US from Unit VI (oral-USD 32 mn; Sterile-USD 3 mn), which is at risk. Although ARBP has indicated that it is trying to establish contact with the FDA to understand scope of the import alert (if it relates to both injectibles and oral products), we ascertain that the near term impact will lead to an immediate loss of sales from these products and could impact earnings by 8-7% for FY12-13E. Moreover, no ANDAs are likely to be approved from this unit (10-12 pending approvals from this facility).

n  Outlook and valuations: FDA overhang remains; maintain ‘BUY’

We are revising down our FY12-13E EPS by 8-7% to INR 22.6 and INR 29.4 per share, respectively, on account of loss of revenue from Unit VI and cost of resolution. Though the stock has already corrected more than 27% in the past four days, the import alert will continue to weigh on valuations till further clarity. We continue to remain positive on ARBP’s long-term story; however, in the short term, the stock may remain under pressure. We maintain our ‘BUY/ Sector Outperformer’ recommendation/rating on the stock with a revised target price of INR 270.