The US FDA’s decision to revoke the 180-day exclusivity cover extended to Indian firm Ranbaxy to sell a generic version of the world’s second-largest selling drug esomeprazole is likely to help domestic rival Cipla, according to Vivek Kumar, research analyst, SBICap Securities.
In an interview with CNBC-TV18’s Sumaira Abidi, Kumar said the FDA’s decision to allow US’ Teva to launch a cheaper copy of AstraZeneca’s Nexium (esomeprazole) may result in a 3-5 percent earnings upgrade for Cipla as the Indian company is a formulations supplier to Teva and has a 30 percent profit share agreement with it.
“But Cipla’s opportunity could be affected by whether further competition comes in,” Kumar said.
AztraZeneca, which notched up sales of USD 3.87 billion for Nexium in 2013, lost the drug’s patent in May last year and Ranbaxy had earlier been given a six-month exclusive period to launch a generic version.
In its statement to the exchanges announcing the development, Ranbaxy did not say why the FDA did revoked the permission -- and whether the decision had to do with the fact that it has banned all four of Ranbaxy’s Indian plants from importing into the US because of quality issues or whether it relates to the case that AstraZeneca and Ranbaxy won in which the former was accused of anti-competitive practices when it paid the latter to delay launching the drug.
Ranbaxy shares over down over more than 1 percent following the news, but Kumar said that investors should look at Ranbaxy’s valuation mainly in terms of how well its merger with Sun Pharma proceeds.
“From a longer term perspective, it depends on how well the companies integrate,” he said. “The management has said it expects synergies of USD 250 million odd in three years. We need to watch how soon permissions come in and how well compliances happen.”
Below is the transcript of Vivek Kumar’s interview with Ekta Batra and Sumaira Abidi on CNBC-TV18.
Sumaira: More than Ranbaxy, it is Cipla I want to talk to you about because Cipla is one of the suppliers to Teva. How much of an earnings per share (EPS) upgrade do you think this would mean for a stock like Cipla?
A: Teva’s approval definitely is good news for the Cipla as it is a formulations supplier and it has a tie-up for about 30 percent profit share, once the Teva launches the product.
It [earnings upgrade] depends upon when follow-on competition comes in, but for the immediate term, it looks like about 3-5 percent. That is the kind of upside risk that is going to be there to earnings. But the actual opportunity would depend on what kind of competition comes in.
Ekta: What about Ranbaxy? The stock has reacted with a cut of about close to a percent and a half. With this down move has it priced in this negative?
A: We will have to see. A lot more value [in Ranbaxy] gets captured from Sun because sooner or later we will have to talk about this [company as] Sun per se. So, I believe that as a price Ranbaxy [share price] may not be a clear indication per se but from a longer term perspective, depending on the way the two companies integrate and how compliance issues that have been persisting for a while now will actually shape up [will decide] the stock price for the Sun Pharma.
In the near term, I believe that whatever the management has set about synergy of about USD 250 odd million dollars being created in three years, it should hold. But having said, we will have to watch how soon the Competition Commission of India (CCI) approvals come in and how soon the integration process begins to happen.
Sumaira: How is the street finally looking at Dr Reddy's Labs because it now has a Form 483 [issued by FDA with respect to inspectional observations] on its Srikakulam plant? So, possibly there could be a delay in their approval for Nexium generic as well. How are you approaching this stock now?
A: You are right in saying that. Because after all alterations, abbreviated new drug application (ANDA) has been filed towards in late FY13 itself. There is still sometime for FDA to review DRL’s final approval for the generic version. What we also understand is that the EPS is mostly supplied from Srikakulum where 483 it is already imposed.
It is still in corrective-actions implementation phase but if you look at the stock per se, we had a buy rating on this stock with a target price of about Rs 3,600. We have not built in the first wave of generic entry from DRL for this opportunity but over a 12 month scenario we do build that DRL could be one of the younger players entering this market.
Plus what we understand is that the US pipeline for the DRL continues to remain robust which subsides the risk that Russia faces -- which drives about 13-14 percent of the overall turnover. So while Russia can be a near term [headwind], from a longer term perspective with about a 12-15 month time scenario, the US injective is going to continue to play an important role in the overall valuations for the DRL. So we continue to like this stock.
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