Sun’s key Halol facility got a Form 483 with three observations during reinspection which ended recently. The details of the observations are not known. Halol resolution is a key near-term trigger for Sun Pharma. Halol is a key driver of earnings recovery and we build a resolution in the current quarter. With valuations full at 21.5x FY20 P/E, resolution remains key for the stock.

Halol gets Form 483 with three observations

Sun Pharma announced that USFDA has completed the re-inspection of its Halol facility. The inspection started on 12 February and was completed on 23 February. It has received a Form 483 with three observations. The details of the observations, though, have not been disclosed.

Remediation ongoing for 3 years

Halol is a key facility for Sun, contributing 25% of US ex Taro revenues. Also, most of the key pending filings are from this facility. The facility has been under remediation since Sep-2014. The company had received a warning letter in Dec-2015 regarding inspection done in Sep-2014. It had a re-inspection in Nov-2016, which resulted in nine observations. The company has since done further remediation and recalled USFDA which resulted in the current re-inspection.

Resolution key for stock to sustain valuation

Halol resolution, in our view, is key for Sun Pharma’s earnings and valuation. Most of the key filings are from this plant and a significant part of the earnings recovery is reliant on the resolution. Also, it has been three-plus years of remediation by the company and any adverse observation now will raise questions on quality and, hence, impact valuations.

Earnings recovery to be gradual as specialty investment to continue

While we build a Halol resolution in current quarter, earnings recovery will be gradual as investment in specialty continues. Currently, we don’t build upfront investment for specialty in our estimates and this can offset part of the gains from Halol. While Sun is best positioned to transition to specialty, in our view, the benefits are still some time away. Valuations at 21.5x FY20 P/E are at a premium to the sector and do not leave room for disappointment.