>RANBAXY: Resolution of manufacturing issues at Paonta Sahib and Dewas facilities takes shape under consent decree

■ Consent Decree with the FDA: Ranbaxy announced that it has entered into a consent decree with FDA resolution of affected facilities – Paonta Sahib and Dewas. Although the terms and conditions of the decree will be publicly available soon, we believe resolution is likely a long process. Additionally, Ranbaxy has made provision of USD500mn in connection with investigation by the US DoJ which is in excess of USD300-400mn expected (though actual fine may be lower).


■ Resolution timeline unpredictable: As per previous consent decrees entered by other companies with the FDA, the resolution process can take any time between five and eight years. Watson vacated consent decree put in 1998 against its Steris Lab facility in 2004. KV Pharma too announced approval of first discontinued product (Potassium Chloride) in Sep-10 after entering consent decree in Mar-09 (and closing its Ethex corp. facility). Among other Indian generics, Sun Pharma’s subsidiary Caraco entered a consent decree with FDA in 2009 and it is still working towards remediation process having received no
product approval during this time.


■ Slower ramp up of generic Lipitor adds to concern: In the second week of launch, Ranbaxy managed to grab c14% of total prescription market versus Watson’s (authorized generics) share of 45%. We have assumed net profit of cUSD200mn from generic Lipitor assuming 40% market share for Ranbaxy with c65% price erosion. Meanwhile, the company is satisfied with the initial performance and expects ramp-up in additional weeks. Additionally, the company expects to ramp up its base business through new US FDA approved facility at Mohali. While Mohali can be a replacement site for large part of products for Paonta, the site transfer will take significant amount of time and recovery will be a slow process. Ranbaxy has started Nexium formulation supply to AstraZeneca from Mohali facility in Nov-11. Cash position is cUSD360mn for the company.


■ We reiterate Neutral with a revised TP of INR454: We value the stock at 20x (10% premium to 5-yr sector average) Sep-13 EPS of INR 20 and INR53 for para-IV opportunities. We maintain Neutral given lack of clear near-term drivers and built in impact of cash outgo in relation to fine payment. Upside in base business and overall margin improvement can be a positive surprise. Inability to scale up gLipitor and slower domestic recovery is a negative risk in our view.


To read the full report: RANBAXY
RISH TRADER