Compliance worries hit shares in India's top two drugmakers

Credit Suisse analysts cut their rating on Sun Pharma stock to 'neutral' from 'outperform'

Shares in India's two largest drugmakers, Sun Pharmaceutical Industries Ltd and Dr Reddy's Laboratories Ltd, slid on Monday after both reported compliance troubles that could dent profits this business year.

Dr Reddy's said on Friday that it had been issued with a formal warning from the US drug watchdog over three of its plants. A day later, Sun Pharma - which took over rival Ranbaxy and several troubled plants this year - told investors it was still working to fix problems at its Halol facility.

The moves prompted analysts to cut earnings estimates for the full year, sending Sun Pharma's shares tumbling 5.5 per cent to their lowest point in more than a year, while Dr Reddy's lost 3.6 per cent to hit its lowest since June.

The overall market was down 1.1 per cent after the governing Bharatiya Janata Party's (BJP) lost a politically significant regional vote.

Credit Suisse analysts cut their rating on Sun Pharma stock to 'neutral' from 'outperform, saying they saw a 70 per cent chance that the company could be issued a warning letter for issues at Halol.

Sun Pharma already has its hands full as it works on fixing issues at five of its other plants that are barred from exporting to the United States, the company's largest market. Four of these came with its acquisition of Ranbaxy last year.

"We see 2016 as a wash-out year for Sun Pharma as it grapples with issues around Halol, Ranbaxy integration as well as pricing pressure in the US," Kotak analysts wrote in a note.

The two drugmakers did not give any deadline for the issues to be resolved. Kotak analysts, however, estimate Sun Pharma's Halol site - a site it had owned before the Ranbaxy deal - could be cleared by the second half of 2016.

At Dr Reddy's, analysts at Jefferies called the US Food and Drug Administration's warning letter a "major negative", forecasting disruption for up to nine months.

Dr Reddy's said it was hosting a conference call with analysts on Monday evening to clarify investor concerns about the warning letter. Sun Pharma did not immediately respond to a request for comment.

Photograph: Danish Siddiqui/Reuters