Sun Pharmaceutical Industries, which is up 16 percent year to date gave up a little bit of exuberance today. The stock was reacting to its Halol facility receiving six observations from the US Food and Drug Administration (FDA).
But unlike past instances, the stock recovered some of its intraday losses. This intraday recovery might be a sign that the street is more confident about Sun Pharma resolving the latest issues at the Halol facility more swiftly and efficiently than the past.
Halol located in Gujarat is one of Sun’s main US facilities manufacturing injectables. It comprises of around 50 new drug filings for the US.
Halol has had a chequered history with the US authorities. The problems with US compliance at Halol began in September 2014 when the plant was issued a whopping 23 observations.
These observations eventually culminated into a Warning Letter by the US FDA for the facility in December 2015. That meant all new approvals would come to a halt till the remediation was undertaken and accepted by US authorities.
In December 2016, one year after the warning letter was issued, the US FDA re inspected the facility, issuing the plant 9 observations. The issues remained.
However, the US FDA reinspected Halol again in February 2018. And this time seemed to be the lucky charm. The US FDA issued the facility only three observations.
The facility was eventually upgraded to a Voluntary Action Indicated status from an Official Action Indicated status in June 2018. That meant that Sun Pharma would undertake the necessary remediation and communicate it to the US FDA. The US FDA unlike an OAI status would not need to come back and reinspect the facility to give its approval.
Eventually Sun Pharma received the Establishment Inspection Report for the facility in June and also got its first approval from the facility – for cancer injection Infugem in July 2018. So this latest inspection comes just under six months of the previous one by the US regulators.
This latest inspection by the US FDA lasted for five days. It began on the August 27 and concluded on August 31. The inspection was conducted by two US inspectors Angela Glenn and Sarah Ibrahim. These six latest observations issued to Sun centered around the US FDA questioning the sterility and quality practices at the facility.
The inspection was a PAI or a pre-approval inspection. A PAI inspection is undertaken by the USFDA to check the compliance for a specific product before the FDA gives approval.
These inspections are generally limited to manufacturing process undertaken for a specific product and doesn’t get escalated to a full blown inspection, unless of course grave issues are found.
The US FDA can in fact conduct multiple PAI inspections in a year aside or along with a larger facility inspection. The US FDA can also conducted a general compliance inspection in a short span of time.
Experts also are of the opinion that due to the recent contamination issue that cropped up with the manufacturing of API Valsartan by a Chinese company, the US FDA is likely to step on the gas on more stringent and possibly more frequent inspections.
An example to illustrate the point of frequent inspections is with Cadila’s Moraiya facility. The US FDA lifted a warning letter outstanding on the facility since 2015, in February 2017.
In the inspection conducted in February 2017, US FDA issued Cadila’s Moraiya plant zero observations. Despite the home run, the US FDA reinspected the facility in the span of a few months, in September 2017, this time too issuing it zero observations.
But the US FDA it seemed was not satisfied and came back for another reinspection in February 2018, which Cadila passed with flying colours again.
Another significant example was Alkem’s Daman facility. The plant was inspected September 20 to 29, 2016 and issued 13 observations by the US FDA.
The company managed to resolve the observations successfully and received an EIR in December 2016. The US FDA, however was back at their Daman facility doorstep in March of 2018 issuing them another 13 observations. The company managed to resolve these 13 observations successfully again and received an EIR July 2018.
These examples show that inspections while being linked to product approvals or general compliance cannot be predicted. And the reality is getting used to a facility may it be Halol or any other getting inspected at any time.
The resilience that the Sun stock has shown is probably the maturity of understanding this very aspect. For instance, during and after the inspection speculation was rife on how many observations the plant was issued.
Hearsay went from zero to multiple observations. During this time of uncertainty – i.e. August 27, the day the inspection began to September 6, a day before the details of the inspection were released, the stock rallied 9 percent from levels 621 to 677.
In any case for Sun, while the street does not expect an severe escalation to say a Warning Letter or worse an import alert, they are factoring in the possibility of a delay in approvals. And that is one of the reasons SPARC, Sun’s R&D arm was weak as well.
Two key drugs from SPARC’s stable - epilepsy drug Elepsia XR and eye condition drug Xelpros are both filed from the Halol facility. The fear is these approvals could be delayed along with 3-4 more drugs the street was factoring into numbers in FY19 and 1HYF20.
But as of now analysts are not tweaking their EPS estimates. They are not adjusting for a delay in products. They are waiting to see what happens in the next few weeks.
The outcome of this inspection will depend on how Sun Pharma responds to observations and remediates. The gold standard to know there are no issues with the facility however will be an approval of a product from the facility.
First Published: IST