Sun Pharma’s Fortunes Are Tied To This, For Now

Sun Pharma’s near-term fortunes are tied to the outcome of U.S. FDA’s inspection of its Halol plant.

General views of drugs (Photographer: JB Reed/Bloomberg News)

Sun Pharmaceutical Ltd.’s near-term fortunes are tied to the resolution of U.S. drug regulator’s fresh observations for its facility in Halol, Gujarat that faces restrictions on fresh drug filings in America, the biggest market for India’s No. 1 drugmaker.

Inspectors from the U.S. Food and Drug Administration, who started re-inspecting the unit on Feb. 12, issued three observations today. The company’s exchange filing didn’t disclose the details. The review stems from the nine procedural observations that the plant received in 2016. That had followed a December 2015 warning letter preventing the company from making fresh filings.

“We believe the plant has a good chunk of products pending approval,” Alok Dalal, a healthcare analyst at CLSA, wrote in a note. “A further delay in Halol clearance could hurt U.S. recovery.”

The resolution for Halol unit is crucial as generic drugmakers have been cutting prices in the U.S. amid fierce competition. A clearance will unlock several complex generic filings and allow the company to ramp up existing products.

In response to BloombergQuint’s emailed queries, Sun Pharma said, “As a policy we don’t comment on the schedule of regulatory inspections.”

The plant’s contribution to the U.S. sales declined to 11 percent from 22 percent before its regulatory troubles began, according to a CLSA report. Its share in overall sales dropped from 12 percent to 4 percent.

That’s because of two reasons. The acquisition of Ranbaxy Laboratories Ltd. increased the overall base. Also, sales declined amid price erosion and competition from about $350 million to $150 million in three years through March 2017.

If Halol unit is cleared, CLSA forecasts incremental revenue of at least $100 million and $150 million in years ending March 2019 and 2020. It could go up to $200 million and $300 million, increasing its earnings per share by 4 and 10 percent, respectively.

Shares of Sun Pharma declined nearly 20 percent in the last 12 months, ahead of the 17 percent decline in the benchmark NSE Nifty Pharma Index. Nearly 44 percent of the analysts tracking the stock recommend a ‘Buy’. The Bloomberg consensus upside potential is 3.8 percent based on Feb. 22 stock price of Rs 541.15.

Both Goldman Sachs and Citi cited clinical trials of Tildrakizumab, a drug used for skin disease plaque psoriasis, and the outcome of the U.S. FDA’s re-inspection of the Halol plant as the potential catalysts for the stock. Goldman Sachs maintained its ‘Buy’ call while Citi stuck to its ‘Neutral’ rating.

Analysts agree that risk for the drugmaker will be a failure to get an all-clear on the Halol plant.

Yet, Deutsche Bank sees an approval only as a sentiment boost. “We think earnings factor in near- and medium-term upside potential,” Kartik Mehta of Deutsche Bank wrote in a note.

(Updates an earlier version to add fresh information after the U.S. FDA inspection was completed)

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