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The USFDA reinspection at Halol – a mixed bag

Resolution of the media fill-related issue remains a key monitorable

* Recently, the USFDA inspected the Halol site of Sun Pharmaceutical Industries (SUNP) and issued Form 483 with 10 observations

* The observations were largely related to media-fill studies, improvement in aseptic operations, cleaning & maintenance of equipment, personnel training and inadequate root cause analysis.

* Halol contributed about 3-4% of SUNP’s consolidated revenue and had 19 ANDAs pending for approval (in Mar’20).

* We expect a timeline of 3-6 months to resolve the issues highlighted in Form 483.

* While Halol-related regulatory issue could be an area of concern over the near term, steady scale-up in specialty portfolio across global markets and superior execution in branded generics across India/ROW markets bode well for 13% earnings CAGR over FY22-24E. We value SUNP at 25x 12M forward earnings to arrive at our TP of INR1,050. Maintain BUY.

The USFDA issues Form 483 with 10 observations

* The USFDA inspected SUNP’s Halol site during 26th Apr-9th May’22 and issued Form 483 with 10 observations. One of the observations was related to rework on media-fill studies and improve the aseptic operations. Another observation was related to deficiency in the system for monitoring environmental conditions.

* There was also an observation related to cleaning and maintenance of equipment to prevent contamination. There was another observation with respect to a delay in closure of root-cause investigation outcome and subsequent assessment of batches released in the US market.

* Another observation was about separate/defined areas being deficient related to aseptic processing of drugs. There was also an observation with respect to stability testing program being not followed appropriately.

* There were certain observations related to sampling plans, root cause analysis, impact on the batches and lack of training to perform assigned functions.

Checkered USFDA inspection history at Halol since CY15

* The compliance at Halol site has been a mixed bag since Dec’15. After the inspection in Dec’15, the USFDA issued a warning letter (WL) to the Halol site. SUNP resolved the issues highlighted in the WL over 2.5 years. Reinspection in Dec’19 led to an Official Action Indicated (OAI) classification.

* However, with diversification of product pipeline at alternate sites and improved business from other sites, the contribution from Halol has reduced to 3-4% of sales in Dec’20 from 9-10% of sales in Dec’15.

Valuation and view

* We expect 13% earnings CAGR over FY22-24, led by 17% sales CAGR in the US and 12% sales CAGR in the emerging/RoW markets.

* While the regulatory issues at Halol would be a near-term concern, we remain positive on SUNP backed by: a) a ramp-up in specialty portfolio sales, b) steady launches supported by increased MR force in the domestic formulation market, c) market share gains/launches in the branded segment of emerging/ROW markets and d) healthy pace of launches. Maintain BUY

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