Ranbaxy in US FDA trouble, again; stock skids 18%

Ranbaxy has run into rough weather again with the US FDA (US Food and Drug Administration) prohibiting the company from manufacturing and distributing active pharmaceutical ingredients (APIs) from its facility in Toansa in Punjab, for FDA-regulated drug products.

“Toansa facility is now subject to certain terms of a consent decree of permanent injunction entered against Ranbaxy in January 2012. The decree contains, among other things, provisions to ensure compliance with current good manufacturing practice (CGMP) requirements at Ranbaxy facilities in Paonta Sahib and Dewas, India, as well as provisions to address data integrity issues at those facilities,” an official US FDA release said.

Post this development, effectively all facilities for Ranbaxy except the Ohm Labs (US) facility are now prohibited from distributing products in the US. Even for Ohm Labs, Ranbaxy can supply products only with external API sources, analysts say.

Earlier in September 2013, the US FDA had added Ranbaxy’s Mohali facility to the CGMP provisions of the decree.

The markets have given a thumbs-down to the development with Ranbaxy skidding 18% to Rs 343 levels in morning trades on the National Stock Exchange (NSE). Daiichi Sankyo, on the other hand, tumbled 5.8% to a near three-month low of 1,901 yen on the Nikkei.

Impact

Post this development, Ranbaxy will not be permitted to resume manufacturing and distributing API for FDA-regulated drugs from this facility until Ranbaxy addresses its manufacturing quality issues, analysts say. Besides, there would be inordinate delays for Ranbaxy to get approvals for exclusivities like Diovan, etc.

Says Sarabjit Kour Nangra, vice-president – research (Pharma) at Angel Broking: “With this import alert, the operations of the company in US business which contributes around 40% could come under impact,  unless it can compensate for the same at the earliest and mange a smooth supply of key raw material. While the Management has not indicated, the plant is said to manufacture around 70-75% of its API requirements. While we await more clarity on the exact impact on the financials, especially the OPMs (operating profit margins), Ranbaxy could trade at a huge discount to its peers.”

“Also since the company’s OPM are suboptimal, the stock will get valued at EV/sales, where, which we believe, should be in the range of 1.4–1.5x, at almost 50% discount to its peers. Thus, on a best case scenario, where we assume the company’s US business is disturbed only during FY2014, and on account of its US sales only being impacted by 5–15% in FY2015, then in a best case scenario also the stock will have a downside of around 10-15% from these levels. Recommend SELL,” she adds.

Arvind Bothra, vice-president – institutional research at Religare Capital Markets expects US quarterly sales of $125 million (base) to be bit by 35–40% for next three–four quarters, until Ranbaxy gets site transfers for key products. However, this would imply negative operating leverage for its operations which would be underutilised.

“US and India are the only two businesses that have been contributing to profitability and with this adverse regulatory action, Ranbaxy’s profitability for next four–six quarters would be under duress. We expect significant negative impact on stock price following this news and reiterate our stance that Ranbaxy’s quality concerns would weigh on its fundamentals and current valuations are unjustified,” Bothra says.