Ranbaxy Labs - Mohali plant likely to be under USFDA import alert - Angel Broking

After the problems at Ponta Sahib and Dewas, the USFDA is said to have issued an import alert on Ranbaxy Laboratories (Ranbaxy)' Mohali unit. The Mohali plant, being a new one, wasn't manufacturing full scale, but most of the company's new drugs were being slated to be manufactured at this plant. The company was earlier issued Form 483 for Mohali in 2012. This means there were certain manufacturing practices which the USFDA had already pointed out before to the company and the company had time to comply with the problems the USFDA had bought up, which it however failed to rectify.

Implication of possible import alert for the Mohali facility

Since Ranbaxy could not comply with the issues raised in Form 483, the same have now converted into an import alert. While the Ponta Sahib and Dewas units are out of trouble with the USFDA decree, the Mohali plant is crucial for the company's future growth, as in the last three years the company has made filings from Ohm and Mohali. According to the company, the filings from Ohm and Mohali total to around US$6bn of brand value at present and these new facilities were expected to contribute more than 75% to the business even after Dewas and Ponta Sahib get cleared from issues five years down the line.

Road cleared for Ponta Sahib and Dewas facilities but timelines uncertain

Post the USFDA's adverse action in early CY2009 (AIP invoked on Ponta Sahib facility and import alert issued for Dewas facility), Ranbaxy's US sales had been impacted but for first-to-file (FTF) products. Ranbaxy has signed a consent decree with the USFDA regarding the ongoing Current Good Manufacturing Practices (CGMP) issues. We note that the consent decree lays out a plan of action as agreed by the two parties to resolve the outstanding issues. However, the timeline regarding the resolution is still unclear.

As per Ranbaxy's Management, the company has taken corrective actions, as per suggestions by a consultant, and has been working closely with the USFDA to resolve issues. Ranbaxy settled a US suit by pleading guilty to felony charges relating to manufacture and distribution of certain adulterated drugs made at two of its Indian manufacturing units. The US subsidiary of Ranbaxy agreed to pay a penalty of US$500mn, which is the largest settlement with a generic medicine maker till date. With this settlement, the long lawsuit is now over for the company but the timeline for the final approval and subsequent export of products from these facilities is not yet certain.

Outlook and valuation: Given that sometimes import alters take longer to resolve, as seen in the case of Ranbaxy (came in in 2008 and still unresolved), they could be a huge setback for Ranbaxy as it now has only Ohm Labs to service its US business. We await more clarity from the Management on the exact impact of the development on the financials of the company, especially on the OPM. On the sales front, it is unlikely to have a major impact as the Mohali facility is fairly new (has been approved in October 2011) and has been supplying to the US only since 1QCY2012. Hence we are not changing our estimates on the stock as of now.

However, given the likely impact the development can have on the future growth of the company and the adverse impact on profitability (unless the issue is resolved soon), the stock will trade at a huge discount to its peers. Hence we reduce our, rating to Neutral on the stock.

Source : Equity Bulls

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