Sun Pharma slips 3% on production halt at Mohali unit for corrective actions

Sun Pharma shares were down 3 percent in early trade on April 24 as the company temporarily halted production at its Mohali unit to fix the issues flagged by the US FDA.

The drug regulator had inspected the plant in August last year, and subsequently classified it as ‘Official Action Indicated’ (OAI). This is the strictest classification and is issued when the US health regulator is not satisfied with the company’s response to the observations made during the inspection.

The US FDA has now directed Sun Pharma to correct certain procedures at the Mohali facility before exporting final product batches to the US.

At 9.46am, shares of Sun Pharmaceutical Industries was trading with a cut of 2 percent at Rs 975.02 on the National Stock Exchange.

The US FDA categorises a manufacturing facility into one of three categories – No Action Indicated, Voluntary Action Indicated, or Official Action Indicated – after conducting an inspection. An OAI is the strictest classification and is issued when the US watchdog is not satisfied with the company’s response to the observations made during the inspection.

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  Here’s what brokerages believe

Brokerage firm ICICIdirect highlighted that the production unit under review in Mohali had previously been a Ranbaxy facility and was put under the Consent Decree from the US FDA since 2013 when it also received an import alert, which was later lifted in 2017. While ICICIdirect doesn’t see any major overall impact of the OAI status, it believes this move by the US FDA may lead to stricter scrutiny for other plants.

Global research and broking firm Nomura sees this development as a negative surprise for Sun Pharma. Analysing the observations mentioned under the US FDA’s Form 483, issued after its inspection of the Mohali facility last year, Nomura noted the risk of data integrity highlighted in the report. “The USFDA’s step to ensure further scrutiny of batches at the site signals an escalation of the matter, in our view,” Nomura said in a report.

Also Read: Sun Pharma pauses production at Mohali facility to implement US FDA corrective actions

The Mohali facility specialises in oral solid formulations and manufactures products like Pantoprazole ODT and Diltiazem caps XR. Since Sun Pharma is the only generic in Pentasa, it is likely to be a very high-margin product. Hence, Nomura believes the stoppage of supplies can adversely impact the pharma major’s profit margins in the near-term.

Another global broking firm, JP Morgan also believes that the action raises questions over Sun Pharma’s ability to maintain regulatory compliance at its plants. Though the firm sees a limited financial impact of 1-2 percent on Sun Pharma’s FY24 earnings since the Mohali facility is a small one, it expects overall revenue to decline further to 13 percent in FY25. “This reduces Sun Pharma’s materiality and should support valuations,” JP Morgan stated in a report.

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