Lupin to see approvals after US FDA gives clean chit: Macquarie

The United States Food & Drug Association (US FDA) has given a partial clean chit to Lupin’s Goa plant. The pharma giant has received an Establishment Inspection Report (EIR) from the regulator stating that July 2015 inspection at the facility is now closed. Of the total 18 observations, 9 from July 2015 and another 9 from March 2016 inspection, the former ones relating to equipment and warehousing have been closed. Nine observations are still outstanding for the company. However, closing of 9 observations is certainly positive for Lupin, says Abhishek Singhal of Macquarie Capital Securities. “Approvals for Lupin will start trickling in only post full resolution of all the 18 observations,” Singhal says. Macquaries continues to hold its outperform rating over a long-term period of 1-3 years. The target price for the stock is Rs 1800. Among pharma largecaps, Singhal’s first pick is Sun Pharma followed by Dr Reddy’s and Lupin.Below is the verbatim transcript of Abhishek Singhal’s interview with Sonia Shenoy & Anuj Singhal on CNBC-TV18.Sonia: Does this Establishment Inspection Report (EIR) for the Goa facility in July mean that new approvals could start immediately or is this just a sentiment overhang that is out of the way?A: We need to look at the background a bit. There were two inspections one in July and the other one in March. Each of these are inspections led to around nine each kind of observations. You had in total around 18 observations outstanding from that facility. Now what has happened yesterday is that the first inspection, which had nine outstanding observations largely towards equipment and warehouse management have been now closed.However, essentially the secondary inspection that had happened in March, you still have nine observations pending. 18 outstanding versus now 9 outstanding, it is definitely one step forward and it is positive to some extent. However, can we say that this facility is now all clear and do we start seeing approvals right away? It is a tough call.Our base case assumptions still believes in the numbers has that the approvals for Lupin starts trickling only post full resolution of all the 18 observations so and we pretty much stand by that at this point of time.Anuj: What next for Lupin for investors because the stock clearly bottomed out? We have seen quite a bit of promoter buying as well over the last one month or so. However, do you think it has now run up enough, do you expect it to consolidate? What is your rating on the stock now and your price target?A: We have a outperform rating on Lupin with an Rs 1,800 target price. The stock is now closed to around Rs 1,684-1,700. Our sense is it is a great stock to hold from a one to three years view. It is very difficult as an analyst to take a call on where the stock is heading over the next six months.Our sense is that historically Lupin has a great track record as far as compliance is concerned. We do believe that this is not going to translate into a bigger regulatory action, the probability of that remains a low. Our stance would be rather than adding on to the stock on decline rather than chasing it up over the next three to six months.Sonia: Do you think Lupin could now deserve a premium compared to some of the other companies purely because it has shown some amount of confidence in its ability to resolve a lot of these issues?A: Among the larger cap names our preferred name is Sun Pharmaceutical. If you look across the board all the largecap names be it Dr Reddy's Laboratories (DRL), Sun Pharmaceutical be it Lupin have had run in with the Food and Drug Administration (FDA) in some form or the other. Of course some have deteriorated in to a warning letter like Sun Pharmaceutical and DRL and even Cadila Healthcare.Our sense is that which one is closest to resolution, I would say that Sun Pharma is offering its facility for re-inspection Halol sometime this quarter. Possibly it has been two years since their last inspection of that facility in September 2014.If you ask me to pick one among the larger cap names Sun Pharma is the one that we back. However, DRL and Lupin are also the ones that we like on a longer term basis. They have outperformed rating on that but an absolute one pick would be Sun Pharma.Anuj: Do you track Aurobindo Pharma that is also making a bit of a move?A: That is one stock that we still don’t cover it.