Brokerage firm JP Morgan has maintained its "overweight" rating on Indian pharmaceutical major Sun Pharma despite the news that the USFDA has issued a Complete Response Letter (CRL) to subsidiary Sun Pharma Advanced Research Company (SPARC).
JP Morgan says the company had received a similar CRL in July-August 2015 from the USFDA for Xelpros and it had already indicated that “a satisfactory resolution of the cGMP deficiencies at the facility is a prerequisite for the final approval of Xelpros”, which had given indications of potential impact on recently approved SPARC products such as Elepsia XR.
It further adds, "As per the release, the withdrawal of approval for Elepsia XR relates to the compliance status of the facility on the date of approval, which is Mar-2015, rather than the progress/current status of the Halol facility, in our view."
While the brokerage warns of volatile quarterly results owing to one-time charges, it says the potential upside from the Ranbaxy deal in the medium-term (synergies from FY17 onwards) does strengthen the case for buying the stock at current levels.
JP Morgan had, in early January, upgraded the stock to "overweight" from "neutral" with a target price of Rs 925 per share.Sun Pharma shares have risen 3.5 percent over the last one year, lagging peers that have rallied anywhere between 32-60 percent. Biocon is the only exception as it has fallen over 10 percent on a year-on-year basis.
Excerpts from the report:
- We believe the extended timeline for the Halol facility remedial action does not necessarily highlight the severity of the observations, but possible complexity in some required changes before starting commercialization.
- We believe Sun Pharma's commentary in the last earnings call on a back-up site for critical products as a derisking strategy should provide some relief on potential site transfer being initiated for key upcoming approvals/products.
- Given the lingering concerns of one-time integration cost and Halol disruption, the brokerage believes the focus will now shift to FY17 margin improvement over the next few months.
- We expect margins to improve to over 30 percent in FY17 aided by a lack of one-time integration costs, normalization at Halol and deal-related synergies flowing through.
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