The company in a statement to the stock exchanges clarified it had not yet received any formal communication from the US FDA about the import alert. The key impact of the Mohali import is that the company’s future pipeline of products and its margins will be impacted.
Margins under pressure
The sharp uptick in price seen before Monday’s collapse was primarily on account of strong base business growth in the US, first to file opportunities and the likely improvement in margins due to higher asset utilisation on resolution of its two plants under the scanner. That hasn’t happened yet. Says Aarthisundari Jayakumar, an analyst with Elara Capital: “The company has had a series of issues with the US FDA since the past five years. Despite paying $500 million in settlement/charges, there is no resolution in sight.”
While there will be no immediate financial impact from the US FDA import alert on its Mohali unit as it does not supply to the US market currently, Ranbaxy’s margins could come under pressure. Says Ranjit Kapadia of Centrum, “Shifting of its production to the US facility, where the costs are high, increased consultancy charges to resolve the legal and regulatory issues at Mohali and impact of pricing policy on domestic sales will have a bearing on margins”. Margins will continue to be in single digits, he adds.
The bigger concern, however, is the impact on the company’s future product pipeline. Says Sarabjit Kour Nangra, vice-president (research), Angel Broking, “What is more worrisome is that this (Mohali) is a new facility and is supposed to be the future revenue generator for Ranbaxy. More than the current numbers (financials); the impact will be felt on the financial performance. The management had earlier indicated that from the Mohali unit and Ohm’s Gloversville (in US) facility put together, the company had planned to launch products worth $6-billion in the next couple of years.”
While only one product (generic of cholesterol lowering drug Lipitor) was approved from the Mohali plant, Ranbaxy has indicated there are 34 filings pending approval from the Mohali and Ohm labs facilities. It is this list, especially product approvals filed from the Mohali plant, which is now at risk.
“The import alert will impact Ranbaxy’s future launches. The company and the markets were expecting approvals for generic anti-viral Valcyte and Diovan (controls high blood pressure) this quarter, which will now get delayed by at least six months. These two drugs could have easily added Rs 12-13 in EPS (earnings per share) and all this now gets pushed back,” adds Jayakumar of Elara.
Given the latest development, analysts remain cautious on the prospects of the company and suggest one can avoid the stock at the current levels given the uncertainty.
“Given the current situation, the stock is unlikely to trade at a fundamentally fair valuation. Given the uncertainty, I don’t think that the stock will go up in a hurry. It can remain under-valued for quite a long time now,” Nangra points out.
While an import alert usually pushes back the product launch by around six months, in the case of Ranbaxy, the launch could get delayed to the second half of calendar year 2014 as the company has had issues with US FDA regarding some of its other facilities.
However, there is a silver lining. One must note that till the time Ranbaxy launches the generic version of Valcyte and Diovan, there will not be any other generic competitor for this product.
“So, to that extent, the US FDA may be tempted to get these products out, provided Ranbaxy can manufacture and supply them from their other facility,” Jayakumar adds.