Decoding why Ranbaxy stocks crashed 30 percent in a single day

Shares of India's largest drugmaker Ranbaxy Labortories ended 30 percent lower today at Rs 318.15 as the USFood and Drug Administration has issued an import alert on drugs produced by the company at its Mohali plant in Punjab, for violation of current good manufacturing practices.

Detention without Physical Examination popularly known as "Import Alert" or "Import Ban" of Drugs is due to non-compliance with drug GMPs or good manufacturing practices.Under the decree, Ranbaxy is prohibited from making FDA-regulated drugs at the Mohali facility and introducing them into the United States until its methods, facilities and controls are in compliance with good manufacturing standards.

About Rs 831 crore of investor wealth has been eroded due to the stock tanking 30 percent.

Here are 5 reasons why the stock has been the biggest market mover today:

1. Ranbaxy will not be able to ship drugs manufactured in the Mohali plant to the US

US FDA has issued an import alert on drugs produced by the company at its Mohali plant in Punjab, for violation of current good manufacturing practices. According to information available on the USFDA website, the import alert, dated September 13, will cover all 'drugs and drug products' produced by the company at the Mohali plant.While the US health regulator did not specify details for issuing the alert, it said "detention without physical examination may be appropriate when an FDA inspection has revealed that a firm is not operating in conformity with current good manufacturing practices (GMP's)".

Getty Images

Getty Images

The same plant was even inspected last year and inJune 2013, the stock had slipped 4.5% on reports that the US FDA had issued a Form 483 against the Mohali unit after finding deviations from prescribed norms while inspecting the plant.

With the latest FDA action, all three Ranbaxy plants in India that are dedicated to the US market, which accounts for more than 40 percent of its sales, have now been barred from shipping to the United States.

Ranbaxy will now have to rely on its wholly owned unit in the United States, Ohm Laboratories Inc, to supply medicine to the world's largest economy, Reuters reported quoting an unidentified company source.

2.This is not the first time that the unit has come under US FDA's scanner

This is the third Indian plant of Ranbaxy Laboratories that has been sanctioned with an import alert ban from the US FDA.

The FDA had inspected Ranbaxy's Mohali plant in 2012 and suggested compliance issues within the plant. In May this year, Ranbaxy had pleaded guilty to "felony charges" relating to manufacture and distribution of certain 'adulterated' drugs made at two units in India and agreed to pay $500 million to US authorities as penalty. This followed a series of action taken by the USFDA, which in 2008 banned import of 30 generic drugs produced by Ranbaxy at its Dewas (Madhya Pradesh) and Paonta Sahib (Himachal Pradesh) plants for violation of manufacturing norms. The company had admitted to past "shortcomings" but said it has rectified those and insisted that its drugs were safe and efficacious. It had also offered to co-operate fully with any regulator from anywhere in the world wanting to investigate its manufacturing practices.

3.USFDA move is certainly a negative sentiment for the company

The Mohali plant is a very important for Ranbaxy as Diovan was likely filed from Mohali unit and any delay in the launch will be a huge negative.

Sriram Rathi of brokerage firm Anand Rath, told CNBC-TV18 that Ranbaxy is not selling any product from this plant. It is thus likely to hit sentiments more than the actual balance sheet.However, he cautioned that if the companies' exclusivities which are still in the pipeline like Diovan and Valcyte are from this plant then there can be significant financial impact.

"There were no direct sales to the US from Mohali as of now, so EPS wise there is no hit to numbers yet. However, several ANDAs had been filed from Mohali, which will now take time for approval," brokerage house Citi wrote in its note to clients.

In other words,Mohali is a new facility and is supposed to be the future revenue generator for Ranbaxy, so the impact will be felt on the future financial performance of the company rather the current.

4. HSBC downgrades stock

Reacting to the import alert, HSBC downgraded Ranbaxy Laboratories to 'underweight' from 'overweight' andalso slashed its target price from Rs 440 to Rs 421.

"Import alert on Mohali facility not in line with expectations as hopes for Diovan launch from Mohali have been dashed," said the HSBC report. However, they don't see any financial impact due to import alert but delay in new product approvals will hit long term recovery.

5. Ban impacts pipeline

Sarabjit Kour Nangra (VP-Research, Pharma), Angel Broking, Mumbai, said the pharma major, after the problems at Ponta Sahib and Dewas, has to contend with the import alert issued by the US FDA on its Mohali unit. Though manufacturing was not on at full scale at the new plant, the company had planned to produce most of the new drugs there.

She said the plant was issued Form 483 in 2012 indicating that there were some manufacturing issues which the USFDA had pointed out giving Ranbaxy time to comply with them. However, as the company could not meet them, the 483 has now been converted into an import alert.

Nangra felt that Mohali plant was crucial for Ranbaxy since the company had in the past three years had made filings from Ohm and Mohali. The filings from Ohm and Mohali were worth around $6 billion of brand value at present and the new facilities were expected to contribute more than 75 percent of the business.

She said the import alert could be a "huge setback" for Ranbaxy since it has only Ohm labs to cater to its US business and would trade at a significant discount to its "near comparable peers" such as Cipla and Lupin. She felt that after today's fall the stock has little "left in terms of the decline fundamentally" and was neutral on Ranbaxy.

And while only one product (generic of cholesterol lowering drug Lipitor) was approved from the Mohali plant, Ranbaxy has indicated that there are 34 filings pending approval from the Mohali and Ohm labs facilities. These approvals are now at risk and could delay the launch of new products.

Ranbaxy in a statement to the BSE clarified that it has not received any import alert for its Mohali facility in India from the US FDA. But this did not inspire the investors and the stock continued to bleed much after clarification was posted on the BSE web site.

With inputs from Reuters

Updated Date: Dec 20, 2014 23:06 PM

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