Sun Pharma shares trail Sensex first time in seven years

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Sun Pharma replaces domestic formulations distributor, changes auditor for subsidiaries

Mumbai: The dream run of Sun Pharmaceutical Industries Ltd, India’s largest pharmaceutical firm by revenue and market capitalisation, has come to a halt with the stock underperforming the benchmark Sensex index in 2016 for the first time in seven years due to lingering regulatory issues at its manufacturing units.

Shares of Sun Pharma plunged 24% in 2016, which is the worst performance ever since the company was listed on the Indian stock exchanges way back in 1994, according to data from Bloomberg.

The entire pharmaceutical sector has been facing headwinds in terms of regulatory issues, slowing growth in the US, pricing pressure in domestic as well as the US market and adverse currency movements in emerging markets.

So far in 2016, Aurobindo Pharma Ltd has declined 26%, Lupin Ltd fell 21.35%, Cipla Ltd dropped 10.28% and Dr. Reddy’s Laboratories Ltd was down 3.22%, while Cadila Healthcare Ltd rose 3.05%.

Investor sentiment for Sun Pharma has weakened over the last two years as compliance issues at the company’s Halol plant in Gujarat has clouded growth prospects in the US, its biggest market.

The US Food and Drug Administration (USFDA) had issued Form 483 to the company’s Halol plant in September 2014, citing 23 observations relating to deviations from manufacturing norms and issued a warning letter to the facility in December 2015.

Despite the remedial measures taken by the company, the US drug regulator again found violations of good manufacturing practices when it re-inspected the Halol unit recently between 17 November and 1 December.

“Regulatory issues will continue to keep Sun Pharma’s stock under pressure. The clearance of Halol plant is crucial for the company,” said Ranjit Kapadia, senior vice-president, Centrum Broking.

But it is not just the Halol plant. The company’s Karkhadi unit and four facilities—in Mohali, Dewas, Paonta Sahib and Toansa—which originally belonged to Ranbaxy Laboratories Ltd, are under an import ban of the USFDA. Sun Pharma completed acquisition of Ranbaxy in March 2015.

The other concern for Sun Pharma is the ongoing investigation of the US Department of Justice’s antitrust division on a possible price collusion by generic drug makers, for which the company and its Israeli subsidiary Taro Pharmaceutical Industries Ltd were issued subpoenas seeking documents relating to employee records, generic products and pricing, communications with competitors and sales of generic products.

“There are lot of uncertainties for Sun Pharma in the near term. I think the stock is oversold but don’t know where the bottom is. Until the Halol plant issues are resolved, the outlook is bleak,” said an analyst, who did not wish to be named, citing company policy.

However, the company’s investments in creating a good pipeline of specialty products and complex generics are expected to play out in the medium to long term and boost earnings, the analyst added.

Some analysts see the price fall in most large-cap pharmaceutical companies this year as an opportunity to buy.

“I think this correction is in the valuation of the stocks and not anything else. Earlier, all these stocks were expensive and this correction is nothing but rationalisation in the valuation. The fundamental prospects of these companies will remain as strong as ever and with this moderated valuation these stocks have become more attractive from the investment prospective,” said Deven Choksey, group managing director, KR Choksey Investment Managers Pvt. Ltd.

Valuations for Sun Pharma are favourable, but weak near-term fundamentals may keep investors on the edge. The stock currently trades at 19.96 times its one-year forward earnings, down from its 5-year historical average of 24.16 times. Sun Pharma’s valuation is attractive compared to shares of Lupin, Dr. Reddy’s and Cipla trading at 22.68 times, 31.98 times and 29.24 times their one-year forward earnings, respectively, Bloomberg data showed.

According to Bloomberg, 37 analysts out of 45 have a “buy” rating for Sun Pharma’s stock. Synergy benefits from Ranbaxy acquisition, expansion in specialty drugs portfolio in the US and steady domestic growth are seen driving the company’s earnings in the long run.