Kotak Securities maintains ACCUMULATE on Ranbaxy

Kotak Securities maintains ACCUMULATE on Ranbaxy

Ranbaxy’s share price has declined significantly after USFDA issued warning letters, and an import alert for drugs from two of its plants in India on 17 September, 2008.

FDA action affected over 30 different generic drugs citing serious manufacturing deficiencies for drugs produced at Ranbaxy’s Dewas and Paonta Sahib plants in India.

As per reports, the members of the US Committee on Energy and Commerce (USCEC) have asked Secretary of State, Condoleezza Rice, to provide details of drugs supplied by Ranbaxy for the President’s Emergency Plan for AIDS Relief (PEPFAR) program.

We estimate these drugs constitute 25-30% of US revenues and are under risk. The management said that 59 drugs are being sold in the US markets from facilities located in US.

Ranbaxy maintains that it has responded to each of FDA’s issues / queries and will continue to co-operate with the ongoing investigations.

Investigation by USFDA and motion filed by Department of Justice (DoJ) will continue to put pressure on the share price and any outcome of investigations and resultant downside is a new risk.

We fear that healthcare authorities of other developed countries may also follow the USFDA move and start reviewing their approvals for Ranbaxy products from these two plants. In that case, the impact on financials is not quantifiable.

Outlook and valuation

We have fine-tuned our revenue and earning estimate to incorporate the new risk of lower sales growth in the US market. We estimate 10% de-growth in US business in CY08-09.

Going forward, we expect growth in US sales to be led by launch of Para-IV drugs under patent challenge settlements viz. Nexium, Imitrex, Valtrex and Lipitor. We believe approvals of these products will not be adversely affected by FDA investigation.

We expect 7.2% and 10.2% compounded growth in revenues and earnings over the next two years. We expect fully diluted EPS Rs.12.9 in CY08 and Rs.19.7 in CY09.

We reduce our price target to Rs423 (from Rs550 earlier). However, we upgrade stock to ACCUMULATE since it offers good potential upside after significant correction from our previous Reduce recommendation.