Aurobindo Pharma under USFDA scrutiny: What investors need to know

Aurobindo Pharma has come under the regulatory spotlight in the past two weeks as the company’s formulation manufacturing facility, Eugia Unit III, could be facing compliance issues. The US Food and Drug Administration (USFDA) issued nine observations after inspecting the Eugia Unit III plant from January 22 to February 2.

The plant is a part of Aurobindo Pharma's speciality business, Eugia Pharma Specialities. The latest development is that the US federal regulator issued nine observations to the plant that manufactures sterile drugs such as injectables and ophthalmics.

According to experts, the observations point to problems with paperwork and procedures. The key concerns raised in this 26-page Form 483 range from issues such as the lack of established procedures to prevent microbiological contamination of drugs purporting to be sterile, to incomplete lab records, and inadequate validation of aseptic processes.

Observations point to deficiencies in manufacturing practices and investors fear if there were questions around the data generated by the facility.

Aurobindo, in response to these findings, has taken proactive measures. The company announced during a recent call that it would submit its response on Eugia Unit 3 by February 26. Moreover, as a cautionary step, manufacturing operations in some lines at Eugia Unit 3 have been halted.

However, the company expects to resume non-aseptic line production in a few weeks and aseptic line production within a month. Unit 3 contributes significantly to Aurobindo’s Eugia business, which accounts for 40% of the company's total revenue.

Aurobindo anticipates a potential impact of $20 million in the fourth quarter due to the shutdown of operations at Eugia Unit 3. However, the company does not anticipate major pending approvals from Eugia Unit III in FY25–26. Aurobindo anticipates sales from new launches in the near term to be between $35 and $40 million, with new launches from Eugia Unit 3 accounting for 50%, or approximately $20 million.

Despite these challenges, Aurobindo remains confident of achieving its 20% margin target, with growth in FY25–26 to be mainly driven by the Revlimid generic.

Analysts say the next port of call will be the company’s response to the observations and the USFDA’s classification of the plant, which is expected within three months of the inspection. If the plant is classified as an 'official action indicated', then the regulator could take adverse steps such as a warning letter that stops future approvals. In the worst-case scenario, it can issue an 'import alert' that stops all current manufacturing and future approvals.

In the event of an import alert, it could impact consolidated EBITDA by 15%, according to Elara, which maintains its buy call with a target price of ₹1,208.

Amid these developments, Aurobindo’s stock has corrected by around 16% since February 1, resulting in a reduction in the FY25 PE ratio to 14.7x, down from 17x on January 31.