MOSL: SUN PHARMA (Buy)-No data integrity issue at Halol-resolution likely over coming months
Sun Pharma: No data integrity issue at Halol; resolution likely over coming months
(SUNP IN, Mkt Cap USD20.2b, CMP INR532, TP INR675, 27% Upside, Buy)
The US Food and Drug Administration (US FDA) inspected Sun Pharma’s (SUNP) Halol plant from 12-23 February 2018. Notably, the number of observations has come down to three this time from nine in the last inspection that was conducted in December 2016. Given that none of three observations issued in the recent inspection are serious in nature (two are procedural in nature and one is related to aseptic processing of drug products), we expect resolution of the facility over the coming months.
- No data integrity issue – an encouraging sign: We note that none of the three observations issued in the recent inspection are related to data integrity – which is a positive sign for the company, in our view. The first observation points out the lack of defined area to prevent contamination in operations related to aseptic processing of drugs. The second observation mentions that the written procedures for cleaning and maintenance do not clearly provide details of the methods to disassemble and reassemble equipment. The third observation is related to written procedure giving details of sampling, testing, approval and rejection of drug product containers and closures.
- Key product approvals linked to Halol facility: SUNP’s US business has been under pressure as no products were approved from the Halol facility after the issuance of the warning letter. Halol facility contributes ~10-13% of US sales for SUNP (down from >20% at the time of warning letter). Resolution of the Halol facility is critical for the company as it would provide visibility on key approvals, including Xelpros, Elepsia and Vagifem. Although the company has already initiated a process for site transfer of key products (e.g. Xelpros and Elepsia), we do not expect any approvals over the next 3-6 months. We expect incremental sales of ~USD100-150m from this facility post resolution. We have already built in resolution of the Halol facility from early FY19.
Sun Pharmaceutical and its subsidiaries are principally engaged in developing, manufacturing and marketing generic pharmaceutical products and bulk drugs. Co.'s products are mainly for the following therapy areas: psychiatrists, neurologists, gastroenterologists, diabetologists, chest physicians, consultant physicians, orthopedics, oncologists, gynecologists, ophthalmologists and cardiologists. Generic names of three principal products of Co. is Pentoxifyline, Pentoparzole Sodium, and Metformin Hydrochloride. Co.'s business can be divided into four segments: Indian branded generics, U.S. generics, international branded generics (ROW) and Active Pharmaceutical Ingredients (API).
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