Revival of fortunes seen for Sun Pharma

Gains seen from transfer of products to Mohali plant

The Sun Pharma stock has tested investors’ patience by underperforming the broader indices for a long period. Even recently, after disappointment with December quarter performance, it had slipped to Rs 622.5 levels. However, things seem to be turning around for the company, part of which is also reflecting in the stock’s recovery to Rs 707.25 now. Large part of this 14 per cent rally has been fuelled by the clearance of Mohali plant by the US Food and Drug Administration (FDA).
 
For one, the Mohali plant had been under import alert since September 2013. While this suggests that drug filings from the plant before the period may not have much commercial significance now, its clearance has renewed confidence in the management’s ability to resolve FDA issues. The company not only had inherited Ranbaxy’s plants (including Mohali) with FDA issues, but its own major plant at Halol (Gujarat) received warning letter; its resolution is crucial to drive growth. With no clarity on timeline for clearance of Halol plant after December quarter results, the Street’s disappointment had increased. Analysts as those at Edelweiss had said remediation for the latest Form 483 observation will take some quarters and Sun is looking to undertake site transfer of some critical products, representing the company’s cautious view versus its earlier commentary. The US growth continued to suffer as competitive intensity increased and delays in approvals for new launches with plant under warning letter adding to woes. Analysts thus see the clearance for one of the plants as positive and hope other plants may follow.
 

Mohali plant’s clearance will help Sun effect some site transfers for launches, especially from the Halol plant. Analysts at Bank of America Merrill Lynch (Bofa-ML) say that Mohali plant could be used as a facility for filing of future oral solids, in addition to site transfer of existing filings out of Halol.
 
Third, and after being delayed significantly, analysts say that Mohali clearance could now lead to synergy benefits from Ranbaxy acquisition. Analysts at Religare Institutional Equities say that resolution would bring in some operating leverage benefits in the medium term, along with creating room for future fillings. Ranbaxy had spent $300 million on the facility before Sun acquiring Ranbaxy, highlight analysts at Bofa-ML who believe, as a result, there could be higher synergy benefits due to operating leverage from the manufacture and supply of drugs to the US from Mohali. Cost-optimisation could also happen as some products were transferred from Mohali to Ohm Laboratories facility in the US, which has a higher cost structure.
 
With Mohali clearance, Sun’s fortunes are looking up. Clearance of Halol plant will be a key trigger, which analysts believe is a few quarters away.