Sun Pharma-FDA: Regulatory Concerns At Dadra facility Can Dent Sentiment, Say Analysts

The US Food and Drug Administration's classification of Sun Pharmaceutical Industries Ltd.'s Dadra facility as 'official action indicated' has sparked concerns over the drugmaker's regulatory readiness, with both analysts and investors holding a bearish view on the stock. The recent technical and derivative data hints that the stock may fall up to Rs 1,330 apiece in the rest of the month.

"We are very bearish on the stock going forward," Anshul Jain, head of research at Lakshmishree Investment & Securities Ltd., told NDTV Profit. The options chain also shows a similar trend with substantial short positions being buildup for the monthly expiry, he said.

The stock is likely to break the Rs 1,500 levels. The immediate support for pharmaceutical stock is between Rs 1,390 and Rs 1,420 and the share price is expected to fall up to Rs 1,330 in April, according to Jain.

On April 12, shares of Sun Pharma had fallen over 4% during the day to the lowest in over three weeks after the FDA's action. The stock has been struggling to recover since then even though the fall in prices was limited.

A significant buying opportunity will be seen after the prices drop to Rs 1,330 apiece, according to Ruchit Jain, lead research analyst at 5paisa. On the upper end, heavy call writing was seen at monthly call option contracts of Rs 1,600 strike prices on Monday, indicating that no major upmove is expected in the stock during this month.

Both the analysts agreed that the recent action taken by the FDA at the Dadra unit could push the stock into a price-wise corrective phase.

But why is the recent inspection alarming for the brokerage firms? The OAI classification from the US drug regulator implies that the company will not be able to obtain the FDA approval for future products until remedial actions are taken.

"It is likely that new approvals may not come through from the site over the next two years factoring in the time for remediation and subsequent re-inspection by the USFDA," brokerage firm Nomura said in its latest report. "An official action at the Dadra facility can delay approvals for oral solid products like gAsacol HD or some oncology oral solids."

The regulatory action has also spread some worries for the company's generic sales revenue. Dadra is one of the key facilities of Sun Pharma, which, including gRevlimid sales, contributes to $240 million in annual sales to the US market (as of fiscal 2024). Not just Dadra, other key facilities, such as Halol and Mohali, have also received the OAI classification by the FDA, leading to a material impact on the company's generic sales.

Hence, there are concerns if the Dadra unit meets the same fate. "The OAI status at Halol, Mohali and Dadra will adversely impact generic approvals over the next two years," Nomura said.

The Dadra event has deepened concerns on Sun Pharma's regulatory readiness, according to Purvi Shah, pharma analyst at Kotak Securities.

"More importantly, after Halol and Mohali, this is the third key facility of Sun now under US FDA's scanner, which raises questions on its compliance practices as well as whether there is any systemic issue on the compliance front," Shah said.

However, the financial impact is still likely to be limited given Sun Pharma’s strong growth in India and specialty businesses, and its potential high-value injectable launches.

"Dadra's US contribution would be just 2% of Sun's overall sales. Hence, in the worst-case impact of any import alert, the EPS (earnings per share) impact on Sun (Pharma) would be limited to low to mid-single digits," Shah told NDTV Profit.

Sun Pharma, however, refused to comment anything beyond what they have already disclosed.