Ranbaxy Labs - "Wait and Watch"; don't "Jump the Gun" - Emkay

Ranbaxy's import alert on its Mohali facility adds to the company's ongoing regulatory woes, with its Paonta Sahib and Dewas facilities already under the import alert and the Consent Decree (CD). We would like to point out that this import alert has come under the new management (post Daiichi takeover), while the previous import alerts were under the old management. Despite the fact that the Mohali facility presently has no sales, this development is significant as it increases risks to planned launches. Ranbaxy now has only Ohm's Labs as a clean USFDA-approved facility. Although we continue to factor in approvals of all the three key FTF opportunities, Diovan, Valcyte and Nexium, in CY14E, we believe any incremental news could put these launches in jeopardy. Also, we believe, there is an increased danger to base business growth even if Ranbaxy is able to launch key FTFs in CY14E, since Ohm's Labs facility might face capacity constraints as it is presently running at full capacity. Under the current circumstances, we believe, it is prudent to have a wait-and-watch approach and not jump the gun.

Impact: We see a marginal financial impact due to the import alert, though it may lead to further delays in new product approvals from the USFDA. Consultation charges for the CD would continue to remain high at 2-3% of consolidated sales unlike our previous expectations of them coming down in line with progress at Paonta Sahib and Dewas.

Ohm's Labs facility the only saving grace: All the three plants of Ranbaxy in India have violated current Good Manufacturing Practices (cGMP) and are under import alert. However, one can take some comfort from the good track record of Ohm's Labs facility with the US regulators, besides the fact that the facility is based in the US. Although we believe a ban on supplies from Ohm's Labs is an unlikely scenario, the fact that Ohm's Labs facility has unresolved pending Form 483 with the USFDA creates uncertainty on approval timelines of pending drugs from this facility as well.

Cashflows on red alert: Ranbaxy has USD986mn debt on the books and USD860mn derivative contracts. The repayment of the debt is to be done by CY16E, with each year's repayments in the range of USD165-385mn. The derivative contracts are maturing at a run-rate of USD35mn per month, and would be over completely by the third quarter of CY15E. Although some working capital debt component would be refinanced, we visualize a scenario where any threat on the existing US business and/or loss of key FTF opportunities might lead to serious cash management troubles for the company.

Our Take: It was expected that new launches from Mohali and Ohm's Labs would help put the company back on growth track. But the new development could impact the site transfer plans for products from Ohm's Labs (US-onshore facility) to India to attain cost advantages and improve margins for the company. Also, as in the previous cases, where import alerts from the USFDA have also triggered regulatory actions from other bodies such as UKMHRA and others, we see increased risks of the same happening in the case of Ranbaxy. We downgrade the stock from BUY to HOLD with a target price of Rs308.

Source : Equity Bulls

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