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India’s biggest drug maker, Ranbaxy Laboratories Limited, has agreed to pay $500 million (around Rs 2,743 crore) to resolve fraud allegations that the company sold adulterated drugs and lied about it to US regulators.
The case relates to US Food and Drug Administration (FDA) inspectors’ allegations about Ranbaxy’s practices in 2006. Its three facilities — at Ponta Sahib and Batamandi (Himachal Pradesh) and Dewas (in Madhya Pradesh) — came under FDA’s scrutiny in 2008.
In December 2011, the company had set aside $500 million to resolve potential criminal and civil liabilities. January 2012 saw Ranbaxy reach a settlement agreement with FDA, where it agreed to stop making drugs for the US market at two plants until these are brought up to US standards.
The markets took note of the development and the stock dipped over 3% to Rs 426 levels at opening today.
For the January–March 2013 quarter, Ranbaxy's consolidated net profit slipped 90% year-on-year to Rs 125.8 crore, primarily owing to a high base in the corresponding quarter last year, when net profit stood at Rs 1,247 crore. The absence of one-off sales of the cholesterol reducing drug, Atorvastatin, also impacted performance.
Market View
Most market participants have a positive view on the company post Monday’s development and suggest that Ranbaxy will now be able to focus on improving its core business.
“I think it is a positive development since the company had already provided for this in 2011. I agree there will be a cash outflow, but the markets would have already factored it into the estimates. Materially, there will be no impact. The development paves the way for a complete resolution as regards the Dewas and Ponta Sahib plants. The knee-jerk reaction of the stock provides a good entry point,” said Rahul Sharma, an analyst at Karvy Institutional Research.
“With continuing improvement in quarters ahead and FTF opportunities expected to unfold in the CY13E and CY14E, we maintain our BUY rating on the stock with a price target of Rs 524,” he adds.
“I don’t think there is any reason for the stock to react so negatively post this development since this is already factored in to the prices. Ranbaxy had already provided $500 million for this. So, an amount higher than this would have been a negative. The only negative is that there is still no clarity as to when the company will re-start these facilities,” said an analyst from a local brokerage.
Adds A K Prabhakar, Senior Vice President (Equity Research), Anand Rathi Financial Services, “The news was already known in the market and the company has already provided for it. Hence, the development will have no impact on the company. Only thing which will have a bearing is the other income (or interest income) which it was generating from the $500 million it set aside will stop coming in, which is again very negligible.”
“With the latest development, the worst is behind Ranbaxy. It can now focus on improving core business operations. Any correction would be chance to buy the stock, as we expect company to perform well going ahead,” he adds.
"One of the overhangs on the stock is now out. However, we believe that stock will be closely monitoring its operating performance, which we believe will take some time to improve. As in the latest quarter the company posted operating margins of ~6-7%, which is much below its peers and hence was the main reason for the stocks under performance," observes Sarabjit Kour Nangra, vice-president (research - Pharma), Angel Broking.
"According to the Management it will take three - four years before margins come in line with its peers. Thus, while valuations are very attractive for a long term perspective, we believe that the stock from a near term perspective looks fairly valued," she adds.
