Sun Pharma: What U.S. FDA Said In Its Letter On Mohali Facility — BQ Exclusive

The U.S. drug regulator, in its non-compliance letter, has flagged inadequate remedial action on multiple violations at Sun Pharmaceutical Industries Ltd.'s Mohali facility.

"Your firm is not operating in compliance with the act, applicable regulations, and the decree at the Mohali facility," according to a "consent decree correspondence/non-compliance letter" issued by the U.S. Food and Drug Administration in April. BQ Prime has obtained a copy of the letter.

The FDA directed Sun Pharma to take certain actions to ensure that the Mohali facility and the controls are "established, operated, and administered in conformity with the current good manufacturing practises requirements."

Sun Pharma informed exchanges that the FDS has asked the company to "undertake corrective action at its Mohali facility before supplying products to the U.S." The company had not disclosed the details of the letter.

Analysts expect the regulator's action to disrupt supply and impact U.S. revenue. The Mohali facility was classified as an "official action indicated" in November 2022.

Here's what the FDA letter said:

• Investigations into unexplained discrepancies were inadequate. The quality unit failed to thoroughly investigate all batches or employees associated with unexplained discrepancies. Two instances were noted.

• Failed to document at the time of performing the required laboratory control mechanisms and to record and justify deviations from the required mechanisms. Specifically, it failed to provide sufficient evidence to demonstrate that water samples were collected on multiple occasions at the times and locations documented by the quality control employee.

• Failed to adequately validate your drug product manufacturing process for ranolazine extended-release. Continued to manufacture ranolazine ER tablets throughout 2021 through 2022, despite failing dissolution results.

The letter stated that subsequent correspondence about the observations listed on Form-483, which FDA received on September 2, 2022, did not adequately address the deficiencies observed during the inspection. "Specifically, your corrective actions and investigations into deviations failed to address the full scope and impact of these CGMP deficiencies, as well as the associated risks, on all batches."

The FDA has asked Sun Pharma to retain an independent person or persons to inspect the Mohali facility to determine whether its methods, facilities, and controls are operated and administered in conformity with CGMP requirements and to conduct batch certifications of drugs manufactured at the Mohali facility.

In the letter, the U.S. FDA has set out batch certification and auditing requirements and independent review requirements, along with steps to be followed and timelines.

Shares of the company declined 0.71% as of 10:04 a.m. on Monday as compared to a 0.84% rise in the benchmark Sensex.

Out of the 42 analysts tracking the company, 38 maintain a 'buy' rating, three recommend a 'hold,' and one suggests a 'sell' on the stock, according to Bloomberg data. The average 12-month consensus price target implies an upside of 21.5%.

Brokerage Views On The Letter

• Retains ‘buy’ with a target price of Rs 1,190, implying an upside of 23% from today’s opening price.

• Key concerns seem to be around data handling and integrity, process control, and out-of-specification investigations.

• Sun Pharma has suspended supplies to the U.S. until it puts in place a CGMP expert who can commence the certification of batches.

• The establishment of a certification protocol and approval by the U.S. FDA could take a minimum of 30–60 days.

• Even after the protocol is approved, supplies will be constrained due to the batch-by-batch approval process.

• In the case of OOS results, a comprehensive investigation of the result will be required before the batch is cleared.

• The disruption will lead to a complete loss of sales in the near term (until the batch approval process is approved by the FDA).

• Sun Pharma may face a permanent loss of market share to competition because of supply disruptions and constraints.

• Estimate that the sales contribution from the Mohali site for the US business is around $100–150 million (annualised), with the largest contribution from gPentasa (more than 50% of the sales).

• The other significant products on the site include Pantoprazole ODT and Diltiazem caps XR. Since Sun Pharma is the only generic in gPentasa, it is likely to be a very high-margin product.

• Hence, the stoppage of supplies could adversely impact profit margins in the near term.

• Reiterate 'outperform' rating with a target price of Rs 1,275, implying an upside of 32% from today's opening price.

• Expect this to have a temporary, mildly negative impact on the financial performance of the company before it resumes supplies to the US.

• The company did not quantify the potential revenue contribution from the plant.

• It also did not provide any timeline on when it would be able to resume supplies from the plant.

• The FDA did not classify the plant as an import alert.

• Since the non-compliance letter refers to the original consent decree (entered in 2012 with Ranbaxy), the FDA may have identified serious glitches.

• Believe the reason why the FDA has not gone ahead with a more comprehensive import alert could be a combination of quality violations not being very severe and chronic drug shortages in the U.S.

• Maintains 'buy' rating with a target price of Rs 1,150, implying an upside of 19% from today's opening price.

• U.S.FDA had escalated the non-compliance action on the Mohali plant.

• There is no incremental impact beyond what was disclosed by the company.

• Although the facility is not placed (yet) under import alert, the FDA has asked for batch-specific testing before releasing final products on the market.

• Product dispatches from the plant will be suspended for some time.

• Pentasa is the most critical product from Mohali, with Sun Pharma making $50 million from this product.

• The Mohali facility overall will contribute $100 million in sales, representing 20% of Sun Pharma's ex-Taro U.S. generic sales and 2% of overall sales.

• With both Halol Import Alert and Mohali escalation, 3–5% of Sun's overall sales could be potentially impacted in FY24.

• Maintains 'buy' with a target price of Rs 1,128 implying an upside of 17%.

• The observations are of a serious nature.

• Exports from Mohali will stall temporarily until Sun Pharma puts the desired corrective action in place and appoints an independent CGMP consultant for batch-to-batch inspection and clearance.

• If Sun Pharma fails to deliver on these directives issued by the U.S. FDA satisfactorily, exports from the facility may be banned.

• Then the Mohali asset is at risk of becoming a non-productive facility for Sun Pharma.

• Revenues of about $70 million, or around Rs 574 crore, may be impacted.

• gPentasa is the biggest product for the U.S. from this facility, with annual sales of around $50–60 million, or around Rs 400–500 crore, followed by gProtonix oral suspension and gRanolazine.