The FDA's moves against Ranbaxy may mean physicians and patients opt for other, 'non-controversial' generics in a highly commoditised market. Though we cut our estimates, the risks may not be fully priced in and more pain cannot be ruled out. Sell.
FDA ban - cascading effect possible
The US FDA first issued a warning to Ranbaxy, regarding its Paonta Sahib plant, in June 2006. In July 2008, the US Justice Department (independent of the FDA) filed a motion alleging fraudulent conduct and improper record-keeping by Ranbaxy. So while the FDA has stated it doesn't believe Ranbaxy's products are harmful, patients and physicians may still move to 'less controversial' generics in what is a highly commoditised market, affecting the sales of Ranbaxy's other products in the US.
Estimates cut, but risks may not be fully priced in; more pain possible
With existing inventories and the weak rupee limiting damage to the top line in 2008, we expect the full impact of the FDA measures will be felt from 2009. We have cut our operating margin estimate (SGA expenses unlikely to fall as much as sales), which knocks 40% off our 2009F EPS. Our estimates do not capture all the risks - there could be more pain if the FDA places more of Ranbaxy's drugs or plants on its banned list or raises safety issues (currently only manufacturing issues) or if more countries place similar curbs on Ranbaxy's products.
FTF accounts for a third of target price; we downgrade to Sell from Hold
Our revised estimates and target price are based on the scenario post the completion of the Daiichi open offer. Due to the uncertain environment, the worst may not be over for Ranbaxy. We believe Ranbaxy may be a victim of political pressure on the FDA to be 'proactive', and a resolution may take some time, especially as the Paonta Sahib issue has not been resolved for over two years. The FTF one-off pipeline represents 33% of our target price, which is also fraught with uncertainties. For instance, valcyclovir HCL (generic Valtrex), one of the agreements Ranbaxy has had with GSK and which is due to launch in 2009, is also on the list of banned drugs. Similarly, patients could prefer Dr Reddy's version of generic Imitrex to Ranbaxy's (both to be launched at end-2008; Dr Reddy's is the AG of GSK, while Ranbaxy is the FTF holder). The stock trades at 25.4x core 2009F EPS and seems expensive, especially in the current environment
FDA ban - cascading effect possible
The US FDA first issued a warning to Ranbaxy, regarding its Paonta Sahib plant, in June 2006. In July 2008, the US Justice Department (independent of the FDA) filed a motion alleging fraudulent conduct and improper record-keeping by Ranbaxy. So while the FDA has stated it doesn't believe Ranbaxy's products are harmful, patients and physicians may still move to 'less controversial' generics in what is a highly commoditised market, affecting the sales of Ranbaxy's other products in the US.
Estimates cut, but risks may not be fully priced in; more pain possible
With existing inventories and the weak rupee limiting damage to the top line in 2008, we expect the full impact of the FDA measures will be felt from 2009. We have cut our operating margin estimate (SGA expenses unlikely to fall as much as sales), which knocks 40% off our 2009F EPS. Our estimates do not capture all the risks - there could be more pain if the FDA places more of Ranbaxy's drugs or plants on its banned list or raises safety issues (currently only manufacturing issues) or if more countries place similar curbs on Ranbaxy's products.
FTF accounts for a third of target price; we downgrade to Sell from Hold
Our revised estimates and target price are based on the scenario post the completion of the Daiichi open offer. Due to the uncertain environment, the worst may not be over for Ranbaxy. We believe Ranbaxy may be a victim of political pressure on the FDA to be 'proactive', and a resolution may take some time, especially as the Paonta Sahib issue has not been resolved for over two years. The FTF one-off pipeline represents 33% of our target price, which is also fraught with uncertainties. For instance, valcyclovir HCL (generic Valtrex), one of the agreements Ranbaxy has had with GSK and which is due to launch in 2009, is also on the list of banned drugs. Similarly, patients could prefer Dr Reddy's version of generic Imitrex to Ranbaxy's (both to be launched at end-2008; Dr Reddy's is the AG of GSK, while Ranbaxy is the FTF holder). The stock trades at 25.4x core 2009F EPS and seems expensive, especially in the current environment
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