Ranbaxy’s tryst with the US FDA - Views on News from Equitymaster

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Ranbaxy’s tryst with the US FDA

Jul 16, 2008

The last three days have seen Ranbaxy’s stock price undergo a roller coaster ride. After being battered by 7% on Monday and pummeled by another 15% yesterday, the stock is the top gainer on the Sensex today with gains of 8%. And the cause of this heartburn has been none other than the US FDA. In this article, we shall take a look at the issue on hand and our view going forward. It all began in CY06
Trouble for Ranbaxy began in early CY06, when its Paonta Sahib facility in Himachal Pradesh was shut down after it failed to comply with certain US FDA standards. One of the main products to be launched from that plant was ‘Pravastatin 80 mg’ for which the company had a 180-day exclusivity. However, due to this development, the company was not able to launch the product in CY06 despite the drug going off patent. While the company did finally launch this drug in CY07 with the exclusivity period, it was through its manufacturing facility in the US, as the issue surrounding Paonta Sahib was still not resolved.

Trouble brews again in CY07…
The company again came under fire in CY07, when the USFDA conducted a surprise raid on Ranbaxy’s Ohm Laboratories in the US. However, the company continued to get approvals for products filed from this plant and did not suffer the same fate as the plant at Paonta Sahib had.

…and in CY08 With the US FDA at the beginning of this week alleging that Ranbaxy had forged crucial data inorder to secure approval for its products and that it was selling substandard drugs in the US, Ranbaxy’s stock lost all its sheen and tanked 25% within a space of just two days. The company in the meanwhile continues to deny all these allegations.

  • Also read - Perverse Engineering

    It remains to be seen as to how all these developments pan out. In the event that these allegations hold true then it will be detrimental to India's largest pharmaceutical company, for which the US contributes around 24% to total revenues. Not to mention the vast sum that the company may have to dole out in potential damages. Given that US is a highly litigious nation, any class action suits filed could also prove to be detrimental to the company.

    Amidst rumours that Daiichi would pull out of the deal following the adverse turn of events, both the companies have stated that the deal remains on track. In the latest development, Ranbaxy has agreed to submit all the relevant documents to the US government following which the case against the former is expected to be withdrawn. This seems to have provided a breather to investors as the stock is up by as much as 9% today.

  • Also read – Ranbaxy sells out to Daiichi: Our view

    What to expect?
    At the current price of Rs 444, the stock is trading at a price to earnings multiple of 13.4 times our estimated CY10 earnings. Barring the US FDA development, the fundamentals of the company continue to remain strong. Topline going forward will be driven by the US market led by new product launches and an FTF opportunity each year till CY10 (each drug for which Ranbaxy has the first-to-file status has generated revenues to the tune of US$ 1 bn). Focus on the emerging markets is also an important part of Ranbaxy’s strategy in terms of bolstering revenues and profitability. As far as ‘Lipitor’ is concerned, while the company initially had planned to launch the drug in CY10 with an exclusivity window, post the settlement agreement with Pfizer, the launch has been delayed to 2011. As we had not factored in ‘Lipitor’ in our numbers, we do not have to revise our estimates in this regard and our positive view on the stock was without considering potential revenues from this drug.

    Investors should note that we have yet to factor the Daiichi deal in our estimates, which will increase R&D spend and reduce debt. Also, our estimates do not include the revenues that will accrue from ‘Nexium’, a US$ 5 bn drug, for which Ranbaxy had entered into a settlement agreement with AstraZeneca. Thus, the fundamentals and the business prospects of the company look strong provided the US FDA’s allegations are proven to be unfounded.

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