Ranbaxy’s Shares Plunge On Import Alert – More Destruction Ahead

The share price of Ranbaxy, which was in recovery mode after the Q1 results, has crashed on news that the USFDA has issued an import alert on its Mohali manufacturing facility. The stock remained 28% down at Rs 325 for most of the day, though at one point of time it had plunged by 40%, just shy of halving the market cap of the company.

By noon, the company came in with a clarification saying, "In response to media reports pointing to the USFDA website that Ranbaxy has received an import alert for its Mohali facility in India, we would like to inform you that the Company has so far not received any communication from the USFDA on this subject. We are seeking information from the USFDA in this regard".

The company had been in deep trouble over issues raise by the US FDA with its other two manufacturing plants, i.e. Dewas and Paonta Sahib. These regulatory issues saw the company pleading guilty before the US Department of Justice, after which it paid a settlement fee of USD 500 million. The consent decree that the company signed in 2011 is progressing well, but an import alert on the Mohali facility would mean more destruction of the stock price going ahead.

Many companies in this sector have been battling similar issues in the recent past. These include majors like Ranbaxy, Wockhardt, Aurobindo Pharma, Claris Lifesciences and Cadila Healthcare. Strides Arcolab has also been served a warning letter for its sterile manufacturing facility.

The Mohali facility is very crucial for Ranbaxy, as exports have already been banned from Dewas and Paonta Sahib. The company is currently using the Mohali and Ohm laboratories as export units, and most of the recent filings have been from these facilities. The huge profits it gained from the sale of the generic of Atorvastatin were also due to the Mohali facility. An import alert means that the company many not be able to file applications from here. It also means that it will have to look elsewhere for the production of the few drug opportunities that it has in 2014.

With a history of regulatory issues, Ranbaxy’s stock should trade in a low valuation range once again. Following the latest development, HSBC has downgraded the stock to the ‘underperform’ category with a price target of Rs 421 on grounds that a delay in new product approvals will hit the long-term road to recovery.

We believe that the stock should trade below 10x its forward earnings, as has been seen in the case of Wockhardt too. This implies a short-term price target between Rs 225-275. Investors should exit the counter as of now.