This is a big blow for the company as the Toansa unit is the only one that makes APIs for Ranbaxy: Emkay Global

Friday’s fall in the stock price of Ranbaxy Laboratories, following the US Food and Drug Administration coming down hard on the drug maker’s “substandard quality” products, has left market analysts very worried.

The US FDA on Thursday prohibited Ranbaxy from distributing in the US drugs manufactured using active pharmaceutical ingredients (API) produced at its unit in Toansa, excluding those made by Ranbaxy’s Ohm Laboratories in New Jersey.

Analysts estimate that revenues worth $200-250 million are serviced by the Toansa plant.

Despite the steep fall of 20 per cent in the drug maker’s share price, analysts are not yet recommending a buy on the stock.

According to Emkay Global, this is a big blow to the company as Toansa is the only plant making APIs for Ranbaxy. This not only would delay future approvals but would also impact its base business in the US as this plant was used to supply APIs to Ohm’s Labs (the only approved Ranbaxy plant for US supplies today) as well.

“Ranbaxy would now have to look at outsourcing options for all APIs. This would impact margins in a severe fashion. Also, this could lead to key FTF (first to file) opportunities launch in being jeopardy. Almost like the worst case scenario for Ranbaxy building up in the US and extremely negative for the company in the long term as well,” said Emkay Global, which advised investors to stay away from the stock.

Valuation at stake

Sarabjit Kour Nangra, Vice-President — Research, Pharma, Angel Broking, recommends a sell on the Ranbaxy stock. “While we await more clarity from the management on the exact impact on the financials, especially the operating profit margins, the stock could trade at a huge discount to its peers.”

Arvind Bothra, Vice-President — Institutional Research, Religare Capital Markets, said: “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 to 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 expects remediation action on the US facilities to take time. As such, there would be inordinate delays for Ranbaxy to get approvals for exclusivities, such as Diovan, he added.

Analysts said the company must now consider an alternative source for some of the larger products but not for the smaller, plain vanilla ones. Until such time, Ranbaxy’s revenue flow will see a disruption, he added.

(This article was published on January 24, 2014)
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