Response to USFDA will be vital; specialty business, with positive outlook, key to earnings; risk reward is favourable; ‘Buy’ retained.
Sun has received eight observations for its Halol facility, of which seven are procedural. One observation states it has failed to ensure “data integrity” for environmental monitoring system. While there is no citation of any instance of this, it could still be serious. The outcome of inspection will now depend on the company’s response to USFDA. Halol contributes 30% of US ex Taro sales. Key for Sun remains its specialty business, where we remain positive.
Halol gets eight observations: Sun Pharma’s key Halol facility was inspected from Dec 3 to Dec 13. It received eight observations. Halol is a key facility for Sun, contributing 30% of US ex Taro sales (6% of overall revenue).
Largely procedural except one: Most of the observations are largely procedural, relating to written procedures and a few are out of specifications. One of the observations is a repeat relating to lack of detailed procedures for sampling. However, this is easily correctable, in our view. Observation 2 is unclear, though.
Observation 2: Form 483 states that the company has failed to establish controls on environmental monitoring system to ensure data integrity. It talks about lack of review of audit trails and QC oversight. The observation does not state that there is evidence of lack of data integrity. It also talks about incomplete data in tags in raw material dispensing containers.
Response to USFDA the key: While the second observation by itself would have been procedural, the mention that company lacks control to ensure data integrity is of concern. The company’s response to the letter would be now key. We have seen multiple cases where FDA has noted the company response and correction plan before deciding on a measure, and we believe this will be the case here.
Remain positive on Specialty: Ilumya’s ramp-up has been slow, but we remain positive on both Ilumya and Cequa. Our doctor survey in the US highlighted that Ilumya could achieve peak sales of $300 mn. The ramp-up, though, is set to be slow, over the next 12M. Ilumya’s ramp-up cannot be compared with Skyrizi’s, in our view, as Skyrizi is expected to have sales of $250 mn in CY19, which is our expectation for Ilumya in FY23.
Risk-reward favourable: Sun is trading at 17x FY21 PE, a 15% discount to peers. Risk-reward is favourable, in our view. We expect the base business to recover steadily though action at Halol could lead to some impact. The key to earnings though remains specialty business. We expect the Specialty business to turn Ebitda positive in FY22, from a $150-mn Ebitda loss currently. Maintain Buy.