Sun Pharma stock gains 8% as company clears FDA's Halol plant hurdle

Sun Pharmaceutical Industries was the top gainer among the Sensex stocks, rising more than 8 per cent on Friday, following news that the company’s Halol plant had been conferred Voluntary Action Indicated (VAI) status by the US Food and Drug Administration.

VAI means that the US drug regulator had found objectionable conditions, but these did not warrant regulatory significance. The street thus is sensing a resolution of the “warning letter” issued to its Halol plant, and consequently, a turnaround in the fortunes of Sun Pharma.

Amey Chalke at HDFC Securities said the FDA classification of the Halol plant as VAI essentially meant it would not need re-inspection for clearance. Echoing similar views, Surajit Pal at Prabhudas Lilladher said the upgrade status of the plant meant the response and remediation works of Sun Pharma were at a level satisfactory for the FDA and critical issues were virtually resolved.

The Halol plant, a key facility for the drug maker, has been under the regulatory scanner since September 2014. It was served a warning letter in December 2015. Resolution of regulatory issues at the plant is considered essential for the revival of the company’s US business, which accounts for 35-40 per cent of its revenue. Prior to the FDA action in 2014, the plant accounted for 8-10 per cent of Sun Pharma's US business. But importantly, a lot of product filings for the US launch were to take place from this plant, especially injectables, which earn high profit margins.

While the pricing pressure in the US on the back of higher competition and channel consolidation has been taking a toll on the company’s base generics business, new drug approvals for launches also suffered. All this affected Sun Pharma's financial performance, and has weighed down on its share price in the past couple of years. The Sun Pharma stock, which scaled its all-time high of about Rs 1,200 in April 2015, was seen around Rs 440 levels last month.

The Halol plant has production lines to manufacture tablets, capsules, liquids, sterile dry powder injectables, small volume injectables, ointments, soft gelatine capsules and aerosols, according to analysts who believe the clearance to the plant can now lead to an improved earnings outlook for the company.

Purvi Shah, pharmaceutical analyst at Sharekhan, said VAI status for the Halol unit was positive for Sun Pharma and Sun Pharma Advanced Research Company (SPARC; a listed group firm undertaking research activities) as it would help in acceleration of approvals from the plant. The next monitorable would be receiving an EIR and lifting of the warning letter, said Shah. EIR refers to an establishment inspection report, which is issued by the US drug regulator and marks the end of successful inspections. Shah had upgraded her recommendation on Sun Pharma to Buy after the March quarter earnings call, with a price target of Rs 565.

The management, during the post-results earnings call, too, had said the Halol plant was likely to be cleared by the FDA in the second half 2018-19. The Halol plant was reinspected by the FDA in the March quarter, and had received three Form 483 observations. Analysts say the company must have sensed that the nature of the observations was not serious and hence was expecting resolution of the warning letter in 2018-19. The confidence was also reflecting in the management's revenue guidance.

Dilip Shanghvi, founder of Sun Pharma, had said after the results: “We expect low double-digit growth in our consolidated top line during 2018-19. This is despite our assumption that the US generics market will continue to be competitive and R&D expenses will increase due to clinical trials.” 

While the development is positive for Sun Pharma, analysts feel gains will be gradual. Ranjit Kapadia at Centrum Broking said it would take a few quarters for benefits to flow post resolution. Also, as 2018-19 will be an investment year for Sun Pharma’s speciality business, and analysts are watchful on margin improvement looking at rising costs on investments. 

Nevertheless, the VAI status will open opportunities of receiving new drug approvals for US markets as the FDA will now start active consideration of pending applications from the Halol plant. Analysts, however, caution that some of the earlier drug applications will be irrelevant as older molecules are crowded with strong competition and price erosion. "Given the track record of Sun Pharma, it will not pursue/launch the majority of the molecules. The management will pursue only ‘profitable growth.' We find Venofer (iron sucrose injection with market size of $350 million) will be one of the few major approvals in 2018-19 from Halol," an analyst said. Any larger than expected product approval can boost earnings for Sun Pharma.

The positive news on Sun Pharma also boosted street sentiment about the sector with stock prices of Dr Reddy’s Laboratories, Aurobindo Pharma and Lupin gaining 4-6 per cent in Friday's trade. SPARC was the largest gainer,  rising 11.36 per cent as the S&P BSE Healthcare index was up 3.6 per cent.

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