Sun Pharma plunges 7 per cent after US FDA issues warning letter

Sun Pharmaceuticals Industries Ltd., the world’s 5th largest generic drug manufacturer received a warning letter from the US Food and Drug Administrator for its Halol unit  in Gujarat.

The USFDA warning letter relates to the inspection carried out of the Halol unit in September 2014, where there were observations made by the authorities regarding the manufacturing practices followed by the company which were allegedly  in violation with the current good manufacturing practices (CGMP). Warning letters are generally issued when the FDA isn't satisfied with the concerned drug maker’s plan to fix quality issues spotted by the regulator. If Sun Pharma is unable to respond to FDA concerns in time and with a satisfactory answer, the regulator could issue an import alert, barring that factory from producing medicines for the U.S. Currently, products manufactured at the Halol facility have not been banned from the U.S., but the FDA has withheld approval for any new products from the plant until the impending issues are resolved.

The Halol facility is among the largest plants for Sun Pharma and a key contributor to its revenues, as it is used to ship multiple formulations to the U.S. market. According to estimates, the Halol facility accounts for about 10% of Sun Pharma’s global revenue.

The unit assumes significance for the company as it can manufacture injectable products like pre-filled syringes which are difficult to make and need a sterile environment, which is a lucrative market for Sun. The global generic sterile injectable market is projected to grow from USD 37 billion in 2013 to USD 70 billion in 2020, representing a growth rate of 10%, according to a Pfizer report, hence representing a huge opportunity for the company in this space.

The warning letter from the USFDA will add to the plight of Sun Pharma. Due to the ongoing issue the company will suffer on the revenue front and subsequently a loss of market share as new product approvals from the site will be delayed further. U.S. contributes to around 50 per cent to its total revenues, which is likely to remain under pressure for some time till the concerns on Halol Facility is resolved. Margins will also be negatively impacted as company would have to undertake fresh investment in its Halol Units in accordance to be a CGMP FDA complaint facility. The company has already moved the production of some of the drugs produced at Halol to mitigate any impact on sales should the Halol plant be unable to export to the U.S.

The Company’s stock tanked by 7 per cent in the early hours of trade as worried investors started to sell the shares. Company’s stock has been a rank under-performer with negative returns of 10.6 per cent on a year to date (YTD) basis. After the news the company’s stock remained at attractive levels as all the negatives have already been factored into the current share price.

Lately many Indian drug makers have come under the scanner of the US regulators due to concerns related to quality controls and manufacturing practices. In recent years, 39 Indian facilities — owned by 27 companies have been blacklisted by the FDA, and banned from exporting medicines to the U.S. market.