Recommendation: Hold

Current price: Rs 376 (at the time of publishing this tip)

Price target: Under review

Key points:

• The US Food and Drug Administration has banned and issued an import alert over 30 generic medicines manufactured at Ranbaxy Laboratories’ Dewas and Paonta Sahib plants in India. In the interim, the FDA will not approve any new product approval applications for products made from these two plants. This could lead to a delay in the approval and launch of generic Valtrex (which features amongst the list of the products banned), for which Ranbaxy has a 180-day marketing exclusivity starting from late 2009.
• The FDA has also found deficiencies in the manufacturing processes relating to sterilisation, cross-contamination of products, equipment cleaning, production control and record keeping. These issues may become grave and could be challenging for Ranbaxy to address, thereby consuming considerable time and effort. The banned drugs include key products like Ciprofloxacin; Clarithromycin; the antiviral Acyclovir; cholesterol-lowering Simvastatin and Pravastatin; and the diabetes drug, Metformin.
• The USA is Ranbaxy’s largest market, accounting for 26% of its revenues and ~35% of its earnings before interest, tax, depreciation and amortisation (EBITDA) in CY2007. The import ban would lead to a significant drop in Ranbaxy’s US business. Rough estimates indicate that the development could lead to a ~3-5% reduction in the company’s CY2008 estimated earnings and a ~13-15% downgrade in its CY2009 estimated earnings.
• The increased scrutiny is also likely to result in a reduced flow of new product approvals in the other markets like Europe. The stock has already fallen by ~7% in reaction to the above mentioned development and is currently trading at around Rs 376.
• I would study the performance of this stock and would recommend future action once I have greater clarity it.