Sun Pharmaceutical: FDA clearance positive but marginal:: Nomura research,

Sun Pharma today announced that following an FDA inspection
earlier this year, the US FDA has found Caraco's Michigan facility to
be in compliance with the requirements of the consent decree.
Caraco can now commence manufacturing operations at the
facility; approval to start with production of Carvedilol and
Paromomycin has been granted. Clearance of the Michigan facility
by the FDA is a marginal positive, in our view, and is in line with our
expectations. Clearance would be granted on a product-by-product
basis and we expect a gradual ramp up in manufacturing. Sun
trades at 19.2x and 19.7x FY13F and FY14F EPS and 12.8x FY13/14F
EV/EBITDA. We maintain our Neutral recommendation.

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The FDA’s clearance to help revival of sales of products were
impacted by US FDA’s action; however, we expect the impact to be
marginal. We have built in USD25m in sales from these products
over two years (FY13-14F)
Following the FDA’s action in 2009, manufacturing was suspended at
Caraco's Michigan facility. This impacted sales of ~30 products that were
manufactured at the facility. These products had annual sales run rate of
~USD100m, on our estimates.
We note that most of the banned products are now intensely competitive
with multiple generic players (please see Fig 1). Hence, we believe that
only a fraction of the lost sales could potentially be recouped in case
Caraco decides to relaunch the products. We are factoring in USD25m in
revenues from these products over FY13-14F on our estimates currently.
This is relatively small when compared to Sun Pharma’s current annual
run rate of more than USD1bn (annualised 1QFY13F US formulation
sales).
Today's development may clear the path for Caraco’s pending
ANDA approvals; Prandin key opportunity
Based on the disclosures by Caraco, we believe ~30 ANDAs filed from
the Michigan facility are pending approval. We believe that site transfers
have been undertaken for key filings like Prandin (USD230m, Caraco is
exclusive FTF). Despite the site transfer, approvals might have been
impacted delayed on account of the ongoing issues at Caraco. Thus,
today's development is a positive and could lead to new approvals. We
currently expect Prandin to contribute USD15-16m in sales for FY13-14F
each for Sun Pharma. There can be upside potential in case of early
approval, in our view.
Overheads can increase following clearance of the facility
Following the ban at the Michigan facility, manufacturing costs were
significantly trimmed at Caraco, in our view. Sun Pharma had announced
that it had instituted an indefinite reduction of 430 employees at Caraco,
which is c.60% of the workforce at Caraco. Resumption of operations
would entail a gradual increase in manufacturing and other costs