Views on Update of Sun Pharma: Angel Broking

Views of Ms. Sarabjit Kour Nangra (VP Research - Pharma, Angel Broking) on Sun Pharma Update:

"Sun Pharma has received a warning letter from the USFDA for manufacturing lapses at its facility in Halol. The Halol facility was inspected by the USFDA in September 2014, following which the regulatory agency had notified around 23 issues that were seen to be in violation of standard manufacturing norms. Regulatory trouble at Halol has already had an adverse impact on the company, given its importance to the company's US revenues as well as for its overall performance going forward. According to the Management the contribution of the facility is around high single digit percentage to its consolidated sales (should be around 7-9% of its sales).

According to the Management, the company has responded to the USFDA inspection observations with a robust remediation process that is still ongoing, with significant investments in automation and training to enhance its quality systems. Sun Pharma has been working with external consultants to ensure its remediation activities have been completed in an appropriate manner. The Management does not expect substantial delay in corrective actions and plant clearance. Also, except Halol, all it's US supplying plants are USFDA compliant as they have successfully completed inspections over the last 15 months without any negative observations. Also, Gleevec is secured from the Warning letter as it has already received final USFDA approval from another plant based in Cranberry, US.

The company expects no major US supply issue or escalation in remediation expenses in Halol but indicated that it is evaluating the Warning Letter using experts / consultants. Thus, management has maintained its FY2016 sales and profit guidance. Moreover, in terms of profitability of the US business, of the company is more dependent on Taro which has high OPM's of around ~60%. However, the management believes Halol is an important facility from the point of view of its future Injectable fillings (expected to be launched from FY2020). So it emphasized priority in making the plant USFDA compliant. In our assessments the worrisome factor is the warning letter coming in even after the company has said to have taken corrective actions for the same. Thus any import alert will take off around 10-12% of the EPS in FY2017. However, given our estimates are currently very conservative in terms of sales and profitability. We currently maintain earnings and a BUY rating on the stock with a price target of INR 950."

Shares of SUN PHARMACEUTICAL INDUSTRIES LTD. was last trading in BSE at Rs.754.45 as compared to the previous close of Rs. 790.45. The total number of shares traded during the day was 946972 in over 26625 trades.

The stock hit an intraday high of Rs. 757 and intraday low of 732. The net turnover during the day was Rs. 705033592.

Source : Equity Bulls

Keywords