Tuesday, January 31, 2012

>RANBAXY: Resumption of review of ANDAs from Paonta and Dewas is subject to Ranbaxy

■ Consent decree seeks permanent injunction: US has filed consent decree of permanent injunction requesting court to a) permanently restrain and enjoin Ranbaxy under the Act, 21 USC from manufacturing, processing-distribution and related activities at all three sites including Paonta Sahib, Dewas and Gloversville; b) order that FDA be authorized to withhold review of any applications from any of these affected sites c) award damages and other equitable relief as deemed fit. As known, Paonta and Dewas have been under import alert since 2008 and Gloversville liquid formulation facility was closed in Oct-11.

■ Resumption of review of ANDAs from Paonta and Dewas is subject to Ranbaxy a) hiring a third party expert to conduct a internal review and audit applications b) implement procedures and controls sufficient to ensure data integrity and c) withdraw any applications that might contain data irregularities or that may make false claims. Ranbaxy relinquishes 180 day exclusivity for 3 small ANDAs, and could affect bigger exclusivities if certain requirements are not met. In addition, it prevents the company from participating under PEPFAR (for AIDS relief) program and allows FDA to cover additional facilities under decree if there is breach of compliance.

■ Base business recovery to take time, downgrading to UW: While company has set aside USD500mn provision for payment of fines, consultant and other fees, exact amount of fine payment is not discussed in decree. Since the announcement of consent decree stock has rallied c17% with expectation of gradual approval of affected products from the facilities. However, based on our understanding from consent decree we believe product approvals will take at least 1.5-2 years. We haven’t built any material recovery in base US sales, possible risk to exclusivities warrant us to lower our target multiple to 18x (from earlier 20x), 20% discount to other large caps. At 18x Sep-13 EPS of INR20 with reduced para-IV value of INR40 (from INR53, discounting due to higher price erosion in Lipitor) our new TP is INR400 (from earlier INR454). We downgrade to Underweight.

■ Valuation and risk
We change our valuation of the base business from 20x Sep-13 EPS to 18x Sep-13 EPS of INR20.03 (discounting RBXY 20% to other large caps like SUNP, LPC) given slower expectation of recovery in US and further delay in resolution of FDA issues. We additionally reduce para-IV value on back of higher than anticipated price erosion in Lipitor in first six months. We reduce para-IV value from earlier INR53 to INR40. Our new TP is INR400.

We believe with slower recovery in US there could be some pressure on recurring earnings in mid-long term which could result in earnings cut across the street. At current market price stock is trading at rich valuations of c22x CY12e EPS.

To read the full report: RANBAXY