Form 483 with 6 observations for the Halol facility highlights risks in the business; ‘Hold’ maintained.
Halol saw a pre-approval inspection in August which resulted in a Form 483 with 6 observations. Of the 6, two observations relating to investigation and quality could take 3-6 m to resolve. While we do not expect an escalation, product approval could be delayed. The key for Sun in near term remains Specialty product execution. While we build Halol ramp-up in 2HFY19, the 483 highlights the risks in the business and timing. With stock trading at 27x FY20 PE Retain Hold.
Halol gets 6 observations in PreApproval inspection: Sun’s key facility Halol saw a pre-approval inspection during 27th-31st August. A pre-approval inspection is an inspection related to a specific product. The inspection resulted in Form 483 with 6 observations.
Observations largely procedural though 2 could take time: Four of the 6 observations are procedural in our view relating to written procedures but the other 2 relate to investigations and quality and could take some time to resolve. One is related to investigations not being started for 11 of 12 products to detect if burkholderia cepacia, a bacteria, is present. The second relates to regular interventions in capsule filing process without adequate checks.
We don’t expect escalation but could take 3-6 months to resolve: FDA could, in our view, require investigations to be complete before clearing this inspection which could take 3-6 m. We though do not expect there to be an escalation of this investigation. The observation severity though remains subjective and we could see another full inspection soon.
Specialty execution the key ahead: Sun Pharma has rallied significantly over the past 3 m on expectation of sharp ramp-up in US—led by Halol resolution and nearing specialty launches. While we expect US ex Taro to see improvement, Taro moderation will offset part of the impact. Additionally, as the current inspection highlights, uncertainties in business remains high. The key then remains Specialty business where execution will be key. This is Sun’s first foray in large branded NCE space and there would be challenges. With the stock trading at 27x FY20 PE, we Retain Hold.