Regulatory issues keep Sun Pharma stock under cloud

Stock is 40% below its all-time high touched last year

Sun Pharmaceutical Industries closed at Rs 712.15 a share on Friday on the BSE, a four per cent gain from Thursday's close as the rupee depreciation helped the export-led firm gain.

However, it has hardly cheered the investors who had earlier seen a dream run for the company’s stock in the past 20 years, that made it India’s most valued pharma company.

At Friday's price, the stock is 40 per cent below its all-time high of Rs 1,200.7 in April last year. This followed the company completing its $3.2-billion acquisition of Ranbaxy Laboratories in March, which made it the world’s fifth biggest generic pharma company by revenue.

Now, however, the US drug regulator, the Food and Drug Administration (FDA) says it found seven breaches of manufacturing standards at Sun Pharma's formulations unit at Mohali, in a recent inspection. 

The facility belonged to Ranbaxy. It had been under an import alert (watch) sounded by the FDA in 2013, two years before Sun completed its acquisition of Ranbaxy.

“The expectation was that Mohali was best placed among all Ranbaxy sites to clear the FDA hurdle,” wrote domestic brokerage JM Financial in a report to investors on Friday. “Despite Sun’s management being in control of the asset for almost two years now, it has been unsuccessful in getting the first of the plants cleared.”

This straightaway means it would be difficult to extract the $300 million of synergy the management said it expected for 2017-18. 

There are problems at non-Ranbaxy units, too. Late last year Sun’s facility at Halol (Gujarat), one of the largest and which it used for exporting to the US, got an FDA warning letter. 

Though less severe than the outright bans faced by the acquired factories, the letter prevented the launch of new US products from the plant and hampered production there. It eventually slowed revenue growth in Sun’s core business and added regulatory costs on top of those they got with Ranbaxy. 

Regulatory issues, particularly at Halol, dented the company’s sales in the US in 2015-16 — at $2.07 billion, these were down eight per cent from the previous year. The US comprises nearly half the company’s revenue. The FDA is currently believed to be inspecting the Halol facility.

Also, the drug maker braces for charges from a two-year US justice department anti-trust investigation. A union representing the sergeants of the New York Police Department is attempting to hit some companies with civil penalties as well. 

Sun Pharma, however, declined to comment.

A pair of lawsuits filed by the Sergeants Benevolent Association Health & Welfare Fund against two groups of drug makers, which include Switzerland-based Novartis AG’s generic drug unit, along with Ireland-based Perrigo and India’s Wockhardt and Taro Pharmaceutical, allege the companies colluded to raise prices on two dermatological creams by as much as 1,000 per cent, starting in 2013. Taro is the Israeli subsidiary of Sun.

Regulatory woes are one part. “We cut the 2018-19 earnings per share by seven per cent as we factor lower estimates for Taro, as the competition has started building in key products,” foreign brokerage Credit Suisse said in a report following the company’s quarterly results announcement this month. “Thus, our target price (estimate of where the stock will rise) also falls by seven per cent to Rs 820 (from Rs 880).” It mentioned the Halol resolution as key potential for an upside in the stock.