Street worries on Ranbaxy

On May 10, the US Department of Justice had announced Ranbaxy had agreed to pay a penalty of $500 million to settle litigation regarding false claims and violation of manufacturing norms. However, several concerns remain.

Since Ranbaxy had already provided for the amount in the quarter ended December, the financial implications had already been factored in.

What worries the Street are details in the order that suggest Ranbaxy deliberately tried to hide facts by providing false data.

As far as the US generics market is concerned, the stakes for Indian pharmaceutical companies are high. Top Indian pharmaceutical companies derive the majority of revenues (in many cases, more than half) from the US market.

Following the recent events, while a part of the industry believes regulatory monitoring would increase, the rest aren’t worried. Sujay Shetty, India leader (pharmaceuticals and life sciences), PricewaterhouseCoopers, said, “The pressure on USFDA (US Food and Drug Administration) will increase to monitor Indian companies.” However, Sarabjit Kour Nangra, vice-president (research) at Angel Broking feels USFDA follows stringent rules on approvals for product launches, and this would continue.

Nangra said Ranbaxy took a long time in accepting and rectifying the errors, while others did so much faster. In 2009, USFDA had issued a warning against Lupin’s Mandideep plant, but the company was able to resolve the issues next year. The 2011 ban on sales of drugs by Dr Reddy’s from its Mexico facility was revoked in 2012, as the company resolved the concerns. Others such as Aurobindo have also resolved issues quickly.

Hitesh Mahida at Fortune Equity Brokers said the events wouldn’t have any impact on Indian companies in general and Ranbaxy in particular —the Ranbaxy case unfolded under a different management. Also, in the US, there have been many instances of companies being proved guilty and having to pay billions of dollars in penalties.

However, these companies continue to run businesses and maintain good market share and leadership.

On Wednesday, the Ranbaxy management issued a release in which CEO and Managing Director Arun Sawhney said Ranbaxy was now a different company. The release also mentioned the improved business and quality assurance standards dedicated towards safe and efficacious medicines globally.

For now, most analysts remain positive or neutral on the Ranbaxy stock. Analysts at Edelweiss said the company was a step closer to resolution of the USFDA issue. They expect one of the facilities (Dewas) to start operations by 2014; multiple niche opportunities being filed out of Dewas have not been accounted for in their estimates.

The analysts say re-supply from the facilities to the US would improve earnings visibility from operating leverage; they peg fair value for the stock at Rs 490 (current price Rs 431).

Mahida, too, remains positive and believes the stock’s correction is unjustified and provides a lucrative entry point to investors. He adds the company’s base business margins would continue to improve, with traction in its branded business in the US, maintenance of a leadership position in first-to-filings after exclusivity and reduction in legal and consultant costs.