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CARACO Pharmaceuticals, the US arm of Sun Pharma, has been slapped with a class action suit in the US for allegedly failing to disclose adequate information about US regulatory action that hurt its shares, rendering India’s most valuable drugmaker vulnerable to the prospect of hefty payouts as damages.
US-based law firm Izard LLP filed the case on behalf of some of Caraco’s shareholders in a Michigan court on July 17. The law firm has also asked other shareholders, who bought Caraco shares between May 2008 and June 2009, to join the litigation.

The US Food and Drug Administration (FDA) started inspections at Caraco’s Michigan plant in May 2008 and issued Form 483, a special form that points out deviations during inspections from the standard US manufacturing practice. The company received a warning letter last November for not addressing the problems.

This March, Caraco, in which Sun owns a nearly 75% stake, voluntarily recalled the entire batch of Digoxin tablets used to treat heart failure and abnormal heart rhythms due to size variability. On June 25, US marshalls seized drugs made at the company’s Michigan facilities and barred it from distributing drugs.

The developments saw the Caraco scrip take a plunge to $2.39 last month from about $10 in May last year.

Sales in the US, the world’s largest drug market, account for a third of Sun Pharma’s total annual sales of Rs 4,272 crore. Its shares took a beating here too, falling 12% on June 26 on the Bombay Stock Exchange (BSE).

"If this is not handled properly, it can potentially snowball into a major problem for Sun Pharma," said a top industry executive who asked not to be named.
   An email sent to Caraco did not elicit any response. A Sun Pharma spokesman also declined to comment.

According to legal experts, US investors could seek damages from companies under US law for losses due to non-disclosure of regulatory investigations.

"Stockholders can claim that they were, for instance, defrauded into purchasing stock because the company failed to disclose some ‘material’ piece of information that would have affected investment decisions,” said William Sarraille, partner at US law firm Sidley Austin Brown & Wood.

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