Don't get excited about pharma cos with USFDA issues: IIFL

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Don't get excited about pharma cos with USFDA issues: IIFL

Speaking exclusively to CNBC-TV18, Bino Pathiparampil, vice president of IIFL Capital says that the market should not needlessly get excited about pharma companies that are bogged down by USFDA issues.

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Excerpts from Bazaar on CNBC-TV18 Watch the full show » ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets Dr Reddys Labs BSE | NSE 29/05/12 Are Mutual Funds betting on Dr Reddys Labs?

Speaking exclusively to CNBC-TV18, Bino Pathiparampil, vice president of IIFL Capital says that the market should not needlessly get excited about pharma companies that are bogged down by USFDA issues. "Once an Indian company gets into an US FDA issue, it's going to be a long winding troublesome way out and there is no point in market getting over optimistic from time to time," he explained.

The US Justice Department filed a "ground-breaking" consent decree in court on Thursday, mandating drug-maker Ranbaxy to adhere to US manufacturing standards and ensure integrity of data at its plants in the US and India. Shares of the company have opened weaker today and have lost close to 6% in trade today.

According to Pathiparampil, the extra negative impact came from the fact the DoJ asked Ranbaxy to give up three of their 180 day exclusivities. "But since it is difficult to pinpoint which these exclusivities are, it is difficult to comment on how this will hit Ranbaxy," he added.

Below is an edited transcript of his interview with Mitali Mukherjee and Sonia Shenoy. Also watch the accompanying video.
 
Q: How have you read the news on Ranbaxy and how detrimental do you think it may be to the stock?

A: The news that has come out is nothing new. It is the same old settlement which Ranbaxy signed in December last year with the US FDA, the only difference being the document is now public. That gives us some extra detail into the whole issue and also the kind of measures Ranbaxy will have to take to address those. These are definitely very stringent and punitive, but I believe that it was expected to be so and I don't think it is anything more stringent then what I expected it to be.

Probably the extra negative impact that comes out of this or becomes evident from this is that Ranbaxy has to give up on three of their 180 day exclusivities. The Department of Justice has not revealed which are those exclusivities, but I believe one of them could be Provigil, the other two could be smaller ones. For most of the larger exclusivities, which are Nexium Actos and Valsartan, I believe the FDA has given specific cutoff deadlines to Ranbaxy before which it has to take care of all their issues in terms of applications integrity and manufacturing quality after which Ranbaxy would be able to monetize those 180 day exclusivities.

Q: What do these lost exclusivities do in terms of down take in earnings for Ranbaxy and how does it affect the EPS and the price target as well from here?

A: Since we are not very sure which these exclusivities are, it's very difficult to comment on that. But still, Provigil, which is one of the three, could possibly have contributed approximately USD 50 million to Ranbaxy bottom-line in CY12. So that could be a reasonably big hit. The other two it's difficult to pinpoint and hence I would believe that they are relatively smaller ones.

Q: What about Dr. Reddy's , there has been a big down take on that as well this morning? How are you positioned on that stock? Any negative news flow on that account?

A: I haven't come across any materially negative news for such a stock price reaction. There was some news on Fondaparinux advertisement website that FDA put out a day back, but I don't think the FDA has prevented Dr. Reddy's from selling the product so that shouldn't be that material.

Plus in general, Dr. Reddy's is riding a good time with the exclusivity in US and upcoming big product launches in the US in FY13. So unless there is something negative which is coming up right now, I would look at using this opportunity to add more to the stock.

Q: For Ranbaxy, are you getting the sense that they are just getting into a deeper hole with the US FDA issues and that's going to remain a clamp down for this company, because the FTFs are where the cream is for the company? Are they getting into a more difficult space there?

A: They already had gotten into that difficult space couple of years back. I think it is the market which went over optimistic on the stock at various points in time and again and again realized that they are still not out of the woods. Otherwise, two years back itself it was very clear that they are in the woods and they will have a long struggling period before they come out of that.

That's not the case with just Ranbaxy. Look at Sun Pharma's US subsidiary Caraco. Its facility went into US FDA issues three years back and it is still completely not out of the issues, it hasn't started manufacturing. So once an Indian company gets into an US FDA issue, it's going to be a long winding troublesome way out and there is no point in market getting over optimistic from time to time.