1. Sun Pharmaceutical Industries rated ‘Hold’ by Jefferies, says resolution of Halol is key to earnings

Sun Pharmaceutical Industries rated ‘Hold’ by Jefferies, says resolution of Halol is key to earnings

Lifting of import alert on Mohali facility only a sentiment booster, though it augurs well for the Halol unit

By: | Published: March 18, 2017 2:42 AM
The Mohali facility came under the aegis of Sun Pharma post their acquisition of Ranbaxy. (Reuters)

The US FDA has lifted the import alert on one of the four erstwhile Ranbaxy facilities (Mohali) of Sun Pharma. While this is a sentiment positive, the event per se will not have any material impact on earnings. This does, however, increase the possibility of an earlier resolution of the Halol facility, materialisation of which would be incrementally positive for Sun.

Event: The US FDA informed Sun Pharma on March 13 that it will (i) lift the Import Alert on the Mohali facility, and (ii) remove the facility from the Official Action Initiated (OAI) status.

Background: The Mohali facility came under the aegis of Sun Pharma post their acquisition of Ranbaxy. Two of Ranbaxy’s facilities were under import alert since 2008. The US FDA then entered into a Consent Decree of Permanent Injunction against Ranbaxy in 2012. In September 2013, the Mohali facility was also issued an import alert and was subject to certain conditions of the Consent Decree. The facility was found to be in violation of the FDA’s current good manufacturing practices (CGMP). Some of the key observations from earlier inspections of the facility in 2012 were failure to adequately investigate manufacturing problems and failure to establish adequate procedures to ensure quality. The most recent re-inspection of the Mohali facility took place in November 2016, which resulted in a Form 483 with seven observations.

Impact: The financial impact of this event in terms of earnings upgrades for Sun Pharma is not significant from this event alone. This is because the last filing from this facility had taken place 4 years ago. Since then, the existing products have been transferred to the US and other facilities. Additionally, this facility did not have a significantly large existing set of product approvals.

Going Forward : It is a bit of a surprise to us that the Mohali facility has been cleared without any further re-inspection, given that the November inspection yielded a Form 483. Nonetheless, we believe that Sun Pharma will endeavour to get not more than 1 more (Toansa) out of the remaining 3 facilities under import alert cleared. The associated impact of lower expenses arising from the lesser extent of remediation is already built in our numbers.
More significantly, this event raises the possibility of a speedier resolution of Halol, which was last re-inspected in Nov-Dec, 2016 and was issued a Form 483 with 9 non-repeating observations. We have built in additional revenues from approvals coming out of the Halol facility from Q3FY18. An earlier resolution could lead to pre-ponement of the additional revenues by a quarter or so.

 

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