After Ranbaxy, FDA now pulls up Sun Pharma

After Ranbaxy, FDA now pulls up Sun Pharma

Mumbai: Sun Pharmaceutical Industries Ltd became the second Indian drug maker in as many months to be pulled up by the US food and drug administration (FDA) for “inadequate and untimely" quality checks at its US arm’s Detroit facility.

The regulator on Tuesday issued a warning to Caraco Pharmaceutical Laboratories, Ltd and has frozen new drug approvals from the facility.

FDA, however, has not blocked Sun Pharma’s exports into the US or asked for mass withdrawal of medicines.

Analysts Mint spoke to said they weren’t too worried about near-term implications for Sun Pharma unless a ban is imposed, as they don’t expect the new drug approval applications from the facility to contribute significantly to revenue. Of Sun Pharma’s 96 new drug approval applications in the US, 19 are from Detroit.

“We are concerned and unhappy about it and we will strengthen internal processes and mechanisms to ensure it doesn’t happen in the future," Dilip S. Shanghvi, Sun Pharma’s managing director, said.

Mira Desai, a company spokeswoman, said the FDA’s warning would have no impact on either current US sales or approval of applications from Sun’s other plants. The company wasn’t planning to shift either approval filings or products from Detroit to other sites, she added.

FDA had in September suspended exports from Ranbaxy Laboratories Ltd’s Dewas and Paonta Sahib facilities in India after investigating the two plants, processes and documents, and filed a legal motion to compel information disclosure by the firm.

Shares of Sun Pharma, India’s biggest drug company by market value, fell almost 5% on Tuesday to close at Rs1,054.10 each on the Bombay Stock Exchange, recovering from a day’s low of Rs983.50. The bellwether index Sensex rose by 2.84%.

Analysts said there would be a bigger and definite “sentiment" blow for the company, but the impact on its finances would be far less unless the warning is followed by a ban. “There will be considerable impact on the stock sentiment as people are more edgy," said Awadhesh Garg, an analyst with Mumbai-based brokerage Kotak Securities Ltd. “They are wondering if what happened to Ranbaxy can happen here as well. If the FDA is not satisfied by the company’s responses, then it may ban manufacturing (in the Caraco plant) but that is the last resort."

Garg does not expect the development to hurt Sun Pharma’s revenue for now, but said if the issue draws out for long, “Sun will have to shift its products and drug approval (filings) to other manufacturing sites."

The financial impact for Sun “will be huge only if the US FDA warning letter is converted into a ban," said another equity analyst who did not want to be named ahead of sharing his analysis with his firm’s clients. If that happens, Sun Pharma’s revenues will be hit by about $120 million, this person added.

Another analyst with a foreign brokerage said there was a bit of paranoia among investors despite Sun’s case being significantly different from that of Ranbaxy’s.

“An FDA letter is to be taken seriously but not enough to shave off a (Rs)1,000 crore from a company’s market cap(italization)," the analyst said, adding that even big patented drug makers had been on the scanner in the past. On Tuesday, Sun Pharma’s market capitalization declined by Rs1,081.71 crore to Rs21,830.71 crore.

In the “unlikely but worst case scenario" of Caraco-manufactured medicines being pulled off the market, there will be 13-14% dip in Ebitda (earnings before interest, taxes, depreciation and amortization, a measure of operating profit), this analyst, who did not want to be named, added.

Caraco’s revenue of $350 million in 2007-08 accounted for 40% of Sun’s revenue.

FDA’s warning letter spoke of “among other things, the inadequate and untimely investigation by our quality control unit of certain incidents at our facility contrary to our standard operating procedures," Caraco said in a filing to the US Securities and Exchange Commission.

The company added that it “intends to respond promptly...within 15 business days."

FDA, in the recent past, has come under fire from US health groups and policymakers for failing to filter adulterated food and medicines, and for slipping on regular audits of overseas drug manufacturing sites.

Radhieka Pandeya in New Delhi contributed to this story.