Analysts estimate the upside, from Halol facility, on FY19 revenues to be in the range of USD 100-150 million with pending approvals gaining momentum
In a breakthrough after years of struggle to get clearance for its Halol facility, India’s largest drug maker, Sun Pharma, on Tuesday announced that it had received an establishment inspection report (EIR) for the plant in Gujarat indicating a closure of inspection. The clearance will pave the way paving for fresh approvals.
The much-awaited announcement came after market hours.
"The agency concluded that the inspection is now closed and the issues contained in the Warning Letter issued in December 2015 have been addressed," Sun Pharma said in a statement to stock exchanges.
The investors cheered the development with the stock moving up by almost 4 percent on Wednesday morning — before settling down with gains of 0.95 percent to end at Rs 545.65. The stock has rallied 11 percent in the past one week.
Analysts estimate the upside, from Halol facility, on FY19 revenues to be in the range of USD 100-150 million with pending approvals gaining momentum.
To be sure, the warning letter is yet to be lifted, but analysts tracking the company say that’s just a mere formality and is expected anytime.
Halol facility is carrying a USFDA warning letter since December 2015.
A warning letter is issued to a manufacturing site if the manufacturer fails to address the violations of good manufacturing practices raised by the US drug regulator to its satisfaction. Though the warning letter doesn't restrict the company from selling products already approved, but it blocks new approvals.
While Sun Pharma has 40 manufacturing plants producing active pharmaceutical ingredients to finished dosages spanning 5 continents and 15 countries, but it was Halol that remained as achilles heel for Sun Pharma's founder and managing director Dilip Shanghvi, who is regarded as turnaround man in the pharma industry.
In fact, Halol site itself is a turnaround story. The large industrial complex came to Sun Pharma's fold post its acquisition of MJ Pharma that went sick in 2005.
Sun Pharma has expanded it by adding more production blocks over the years.
Halol manufactures pretty much every formulation including tablets, capsules, liquids, sterile dry powder injectable, small volume injectable, ointments, soft gelatine caps andaerosols, among others. It has approvals from key regulators such as USFDA, MHRA (UK), MCC (SA).
In FY15, the site accounted for about USD 400 million of sales, which was nearly 15 percent of the company's total sales, before the warning letter was issued. But since then the sales from the plant have fallen to 8-10 percent of the total sales.
In fact, the entire injectable portfolio was filed from Halol site that held key for Sun Pharma’s future growth.
What went wrong?
The problems started for Halol when three USFDA inspectors Parul Patel, Daniel Roberts and Thomas Arista began inspection of the facility on September 8, 2014. The inspection went on for 12 days culminating on September 19 with inspectors detailing 23 observations on 19 pages Form 483.
The facility came under scanner as Sun Pharma made two major product recalls earlier that year — both categorized under Class II — considered to be serious as any exposure to the recalled product may cause temporary or medically reversible adverse health consequences.
Discrepancies in quality control procedures, inadequate root cause analysis of batch failures, lack of robust lab controls, documentation and computer control keeping practices, deficiencies in maintenance of equipment and hygiene of plants were some of the red flags raised in the Form 483.
For the next one year, Sun Pharma sent four updates to the regulator on corrective and preventive measures taken at Halol, but USFDA wasn’t convinced. On December 17, 2015, it issued a warning letter to the company.
The US regulator gave a hard time to the Indian drug makers in 2015. Just two month prior to Sun Pharma's warning letter, the country's second largest drug maker at that time, Dr Reddy’s, also got warning letter for three of its facilities, including its major API supply site at Srikakulam and injectable formulation site at Duvvada, Visakhapatnam. The company is still trying to resolve the issues raised by the USFDA.
“2015 was like a hard landing for large India pharma companies after almost a decade of unbridled growth,” said K Anand, CEO and Managing Director of Mumbai-based pharma consulting firm Qualiminds.
“The top leaders are so much focused on growing revenues and profits, they lost sight of ground reality, the shop floor workers are under pressure from top to produce more, even trading off on quality and compliance sometimes, so the culture deteriorated rapidly,” Anand said.
Path to resolution
For Sun Pharma, which had a decent track record of compliance, Halol warning letter came as major setback.
“Shanghvi put in a robust remediation plan at Halol, he put in multiple measures including training and retraining staff, hired third party foreign consultants; brought in experienced hands from big pharma companies in the quality and compliance wings and invested heavily on automation,” said a consultant who didn’t want to be named as he was directly involved with some of those activities.
In February 2015, Sun Pharma hired Jila Breeze as head of global quality and compliance. With over two-and-half decades of experience, Breeze spearheaded quality and compliance wings of Switzerland-based Novartis and Canadian drug maker Apotex.
Sun Pharma brought in Davinder Singh, former Cipla technical director and veteran in the manufacturing space, to head manufacturing.
The company also got VC Sehgal, chairman of Motherson Sumi Systems on board. Motherson Sumi has an enviable track record in quality standards in the auto industry as component supplier.
Shanghvi wanted some of that success to rub off on his company as well.
Shanghvi also became founding member of Indian Pharmaceutical Alliance, or IPA’s Quality Forum, that focused improving overall quality standards of the industry.
"There were issues at the ground level, definitely, but he and his team have resolved to address them," said Anand whose multi-disciplinary and multi-company group was mentored by Dilip Shanghvi as part of IPA - Quality Forum activities.
Despite all those efforts, it took Sun Pharma close to four years to come out of the web of problems. In December 2016, USFDA re-inspected the facility and issued nine 483 observations and maintained OAI status.
OAI is given when objectionable conditions are found and regulatory action is recommended.
In February 2018, USFDA re-inspected the facility, and this time, issued three 483 observations, with no data integrity issue and no repeat observations, following which it’s status was updated as VAI status.
Known to be a cool person, Shanghvi vented his frustration during the recent earnings call, responding to analyst query on delay of Halol resolution.
“As a large investor, I am also unhappy and we are trying to find a way to get the plant re-certified at the earliest,” Shanghvi said.“It is important for all the analysts or investors also to keep in mind that last year 18 of our sites were audited or we have faced 18 USFDA audits and we came out of each of those inspections with either no 483s or a very limited number of 483s. Halol clearly has taken much longer than what we would have liked it to, but that is a reality and we have to find a way to fix,” he added.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.