Event update: Sun Pharma (Outperformer) - Halol facility receives EIR – FDA clean chit

Event

Sun has announced that it has received the Establishment Inspection Report (EIR) from the USFDA for the Halol facility.

Key highlights

• With the receipt of the EIR, the Warning letter issued in Dec 2015 on the facility is finally cleared. While this clearance was broadly anticipated post the classification of the last inspection as VAI, the receipt of the formal EIR removes any uncertainty on this account
• We had assumed plant clearance in H2FY19, in line with management  Q4FY18 commentary,  so to that extent this is a positive surprise
• The EIR clears the path for Sun to receive new ANDA approvals from Halol facility. Notably, most of Sun’s critical generic drugs have been filed from Halol and given that the facility has had a warning letter since Dec15, it hasn’t been able to secure any of those approvals.
• Going forward, we expect a flurry of approvals for Sun as has been the case with Zydus post the clearance of its critical Moraiya facility
• While information is limited on the specific big ticket ANDAs that could get approved going forward, we estimate $150-200m new niche launches per annum in FY19 and FY20.
• This EIR adds more comfort on Sun’s ability to deliver on our FY19/20 EPS estimates of Rs 19/24 respectively.
• At a broader industry level, this EIR underlines our view that the phase of FDA compliance related challenges is largely behind us. Going forward, focus will shift back to business and company’s ability to get new ANDA / NDA approvals and drive growth in the US will become the key monitorable again

Valuations & view

The receipt of Halol EIR is a major positive development for Sun’s US business. Going forward, along with new ANDA launches, the growth trajectory of Sun’s speciality portfolio will remain the key monitorable. Notably, 3 of Sun’s biggest speciality assets (Ilumya, OTX 101 and Yonsa) are set to be commercialized over the next couple of quarters which will add significant momentum to Sun’s speciality business from FY19 onwards. While there are multiple and formidable challenge in making this transition and it will take time to yield results, it is a strategic imperative for larger Indian players to go down this path. Sun is clearly best placed amongst large domestic peers to make this transition which can create significant value over the medium term if executed well. We continue to maintain our Outperformer rating