Sun Pharma: Minimal impact of US FDA action

The recent import alert should not imply any read-through for its other facilities, analysts say

Sun Pharma has dipped nearly 8% in the last two trading sessions as compared to the benchmark indices – the S&P BSE Sensex and the CNX Nifty – that have remained mostly flat. The fall comes on the back of two negative developments in the last few days.

Earlier this week, the company had withdrawn bottles of diabetes drug from the US market. Its Detroit-based subsidiary – Caraco Pharmaceutical Laboratories – recalled 2,528 bottles of Metformin HCL, a drug meant to treat Type 2 diabetes, after a customer complained of finding tablets of Gabapentin, an epilepsy drug, in a bottle.

In a more recent development, the United States Food and Drug Administration (US FDA) has issued an import alert for all products manufactured at its cephalosporin facility located at Karkhadi in Gujarat. Sun manufactures active pharmaceutical ingredients (API) and formulations at this unit.

“This import alert was issued by the US FDA as a follow up to the last inspection of the facility, during which some non-compliance of current Good Manufacturing Practice (cGMP) regulations were identified. The contribution of this facility to the consolidated revenues is negligible. Sun Pharma maintains its FY13-14 consolidated sales growth guidance,” the company said in a release.

In the past one year, the stock has rallied 46% as compared to 11.7% rise in the S&P BSE Sensex till March 12, 2014. It has also outperformed the S&P BSE Healthcare that has moved up 26.6% during this period.

Impact

Most analysts suggest that the recent developments are likely to have a minimal impact on the company’s fortunes and remain positive about the road ahead.

“According to IMS, this product (facility acquired from Phlox Pharma in 2004) contributed US $6 million to sales in CY13 and accounted for less than 1% of Sun’s revenue. This is the first of Sun’s 14 global FDA-approved facilities (excluding Caraco) to receive an import alert and should not imply any read-through for its other facilities,” points out Balaji Prasad of Barclays Research.

With around six US FDA approved facilities US, three in India and one in Canada, Israel and Hungry respectively, Sun Pharma has well diversified manufacturing infrastructure to cater to the US markets, which contributes around 54% of its sales (FY2013).

“Moreover, its subsidiaries of the likes of Taro, Caraco and the recent acquisitions, contribute a major chunk of the sales and its growth. It has successfully resolved the issues successfully in the past, as with respect to Caraco,” point out analysts at Angel Broking in a note.

As regards withdrawing diabetes drug bottles from the US market, Gaurav Dua, head of research at Sharekhan says that while the recall is not serious in nature and will not have a significant financial impact (an estimated revenue loss of $0.75 million), he considers the recent correction in the stock as temporary.

“Sun Pharma is showing a better traction in the US market on the back of market share gains in its generic Cymbalta and older products like the generics Comtan and Stalevo (month-on-month basis). Although, Taro Pharma and the generic business of URL Pharma are witnessing a moderation in growth, the overall performance of Sun Pharma is set to remain strong in the US market. A strong product pipeline in the US market, leadership in the key Indian therapeutic market and cash rich position (hence inorganic growth opportunities) are some of the drivers of the company's long-term growth,” he says.