Ranbaxy Laboratories - Consent Decree: Double trouble; event update; downgrade to Reduce:: Edelweiss

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Ranbaxy Laboratories (RBXY IN, INR 444, downgrade to Reduce)

Though the roadmap to address FDA issues at Paonta and Dewas is now clearer, provisions of the Consent Decree (CD) are far more stringent than the company guidance and market expectations. Apart from forfeiting the exclusivity for three FTFs, there is a potential risk of losing few more if approval is not managed on time. Moreover, product by product validation can consume time, leading to high costs and thus limiting margin expansion in base business. Downgrade to REDUCE.

Consent Decree more stinging than market expectations

Contrary to the expectation, that after paying a hefty penalty of USD500mn Ranbaxy would be able to monetize all outstanding FTFs, it rather had to forfeit three FTFs as part of the settlement. Besides, there is risk to other FTF pipelines if Ranbaxy fails to manage timely approvals for the same. Moreover, margin expansion will not happen in the near future as we do not expect a material reduction in fixed overheads. Further, overall remedial process may take anywhere between 7-9 months.

Ranbaxy may forgo USD300mn revenue during exclusivity

FDA has not disclosed names of ANDAs that might be relinquished during exclusivity, however sifting through the patent expiry date, we believe Diovan, Provigil, Oxycontin or Actos exclusivity are at risk.

Fixed overheads to limit margin expansion

Product-by-product validation hints a long journey ahead; a complete resolution can take 2-5 years with relatively higher cost. Moreover, CD will remain in force for at least five years leading to high fixed overhead and limit expansion in the core margin.

Outlook and valuations: Downgrade to Reduce

The re-approval roadmap for both facilities is explicit, while the terms of the decree are far more severe than anticipated. Moreover, forfeiting exclusivity is a clear negative for Ranbaxy. Our NPV value for its Para IV pipeline will shrink to INR45. Moreover, core earnings EPS will also dip from INR20.3 to INR18.8 for CY13E.  We value its base business at 18x CY13E to INR340. Our fair value for Ranbaxy will slip to INR385.