US consent decree to weigh on Ranbaxy in 2012
Ranbaxy's fourth quarter earnings got a mixed response from the street on Friday. The stock rose about 1% in early trade but slipped below Thursday's close soon after. Analysts too were divided, although most agree that resolution of all issues with the US Food and Drug Administration is key for Ranbaxy going ahead.
February 24, 2012 / 15:26 IST
Moneycontrol Bureau
Ranbaxy's fourth quarter earnings got a mixed response from the street on Friday. The stock rose about 1% in early trade but slipped below Thursday's close soon after. Analysts too were divided, although most agree that resolution of all issues with the US Food and Drug Administration is key for the pharma major going ahead.The company, owned by Japan's Daiichi Sankyo, had reported consolidated net loss of Rs 2,983 crore in October-December, as it made provisions for settling a probe by the US Justice Department and also incurred foreign exchange losses due to the rupee depreciation. The company's net sales surged 79% year-on-year in Q4 to Rs 3,738 crore, helped by launch of generic versions of cholesterol lowering drug Lipitor and Caduet, which is also used for treating high blood pressure.Deepak Malik and Ashish Thavkar of Emkay Global upgraded the stock to "buy" citing strong margin outlook. But Manoj Garg and Perin Ali of Edelweiss Securities advised investors "reduce" Ranbaxy shares, pointing to "lingering uncertainty" over the consent decree it had signed with US authorities.The US Justice Department had reached an agreement with Ranbaxy last month to resolve violations at some of its manufacturing plants. US authorities said the company had several problems at its plants, which included not keeping written records, not preventing contamination of sterile drugs and submitting false data to the US FDA. The consent decree prevents Ranbaxy from making drugs for the US market from some of its plants until issues are resolved.Ranbaxy's CEO Arun Sawhney said on Thursday that he was satisfied with the progress it was making in resolving the long standing issues with US regulators. The company made settlement provision of Rs 2,648 crore in connection with the dispute in the last quarter.Here's how analysts view Ranbaxy's results in this backdrop.ANAND RATHI: Considering the higher sales from Lipitor in the first month of launch, led by channel filling, we expect sales to moderate in the balance five months, along with higher payment to Teva, the US-based generic company with which Ranbaxy has a tie-up for Lipitor. Hence, we reduce calendar 2012 reported net profit by 42%. Rating: Buy. Target: Rs 505.BANK OF AMERICA: We expect delay in comprehensive USFDA resolution of Indian facilities to pose overhang. We estimate base business profitability to improve gradually as production in US plant should be high in near term. However, current valuation factors the best outcome, capping upside potential. Rating: UnderperformEDELWEISS: We highlight that Ranbaxy has shared 45-50% of profit from Lipitor with Teva, which limits upside potential and could be a key negative. Significant delay in resuming (plant) operations (beyond 6-8 months) and approvals of key ANDAs can impact the growth in the US. Rating: Reduce. Target: Rs 385.EMKAY: Ranbaxy's base business is expected to grow by 27% in 2012 and 19% in 2013. Margins will expand by 400bps in 2012 and 200bps in 2013. Strong Para IV (first-to-file generic products) pipeline which includes Lipitor, Actos and Diovan will contribute USD 560 million in revenues and EPS of Rs 42 in 2012. Rating: Upgrade to Buy from Accumulate. Target: Rs 504.ENAM: Resolution of US FDA issues is key for Ranbaxy's US business. Also, in absence of any such resolution, Ranbaxy's move on monetization of first-to-file pipeline would be eagerly awaited. Rating: Hold. Target: Rs 468.HSBC: Ranbaxy has finalized third party data integrity experts and is working according to timelines set out in the consent decree. The company has guided for base sales of USD 2.2 billion in 2012. We believe large part of this guidance includes generic Lipitor sales post period of exclusivity. Assuming sustainable market share of 20% with over generic Lipitor can add USD20-25 million per quarter in US base business. Rating: Underweight. Target: Rs 420.KOTAK INSTUTIONAL EQUITIES: Higher-than-expected payment to Teva was a clear negative surprise. Sales guidance for 2012 is strong, in line with our estimate; however, we caution investors that Ranbaxy has missed its 2011 base business sales guidance. Uncertainties loom over monetization of near-term F-T-F products. Rating: Sell. Target: Rs 380.At 12:00 hrs, Ranbaxy shares were down 1.2% at Rs 435.25 on NSE.Nachiket Kelkar
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