Ranbaxy labs gets USFDA import alert for its Toansa plant - Angel Broking

"An inspection of Ranbaxy's facility by USFDA in Toansa revealed significant violations of the current good manufacturing practice (CGMP). On Jan. 11, 2014, the FDA concluded that staff at the company's Toansa facility was guilty of retesting raw materials and intermediate drug products but also of finishing API that had previously failed analytical testing and specifications.

Thus, now the drugs from Ranbaxy Laboratories' facility in Toansa will continue to be banned in US until it complies with the current food manufacturing practices (CGMP). The Toansa facility must also be thoroughly inspected by a third-part expert that certifies to the FDA, the facility, as well as its methods and controls, are aligned with CGMP.

Ranbaxy Lab's other key facilities in India, i.e at Ponta Sahib (Himachal Pradesh) and Dewas (Madhya Pradesh), have been under an US import alert since 2008. During the 2QCY2013, its other key facility Mohali also came under USFDA import alert. With this import alert, the operations of the company in US business which contributes ~40% could come under impact, unless it can compensate for the same at the earliest and mange a smooth supply of key raw material. While the Management has not indicated, the plant is said to manufacture around 70-75% of its API requirements.

While we await more clarity from the Management on the exact impact on the financials, especially the OPMs, the company could trade at a huge discount to its peers. In terms of the stock, it is expected to trade at a huge discount to its peers. Also since the company's OPM are suboptimal, the stock will get valued at EV/sales, where, which we believe, should be in the range of 1.4-1.5x, at almost 50% discount to its peers. Thus, on a best case scenario, where we assume the company's US business is disturbed only during FY2014, and on account of its US sales only being impacted by 5% to 15% in FY2015, then in a best case scenario also the stock will have a downside of around 10-15% from these levels and hence any long term investor, should enter the stock at around `340. Thus we recommend a sell on the stock."

Source : Equity Bulls

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