Ranbaxy falls as US settlement provision to hurt earnings

Shares of Ranbaxy Laboratories fell over 3% on Wednesday morning after the drug maker said it has signed a consent decree with the US Food and Drug Administration [FDA] and also has separately set aside USD 500 million to cover any potential penalty from an investigation by the US Justice Department.

Analysts say the settlement with the US FDA is positive and a step forward in the direction of resuming exports from its Dewas and Paonta Sahib facilities. However, the penalty it will pay will hurt earnings and pressure balance sheet, they add.

In 2008, the US FDA had banned Ranbaxy from exporting 30 drugs from its facilities in Dewas, Madhya Pradesh and Paonta Sahib, Himachal Pradesh and also stopped marketing approvals for new ones following quality control and data reporting issues.

Ranbaxy on Wednesday said it has committed to further strengthen procedures and policies to ensure data integrity and comply with current good manufacturing practices.

"We are pleased to have resolved this legacy issue with the FDA as we begin the next chapter in Ranbaxy's history…While we were disappointed by the conduct that led to the FDA's investigation, we are proud of the systematic corrective steps we have taken to upgrade and enhance the quality of our business and manufacturing processes," said Arun Sawhney, CEO & MD.

"The USD 500 million penalty provision is a bit high, it will hurt earnings," Hitesh Mahida, healthcare analyst at PUG Securities told moneycontrol.com.

Ranbaxy recently launched a generic version of cholesterol lowering drug Lipitor in the US Market. This launch is seen as one of the biggest catalyst to its growth. Analysts are expecting Ranbaxy's copy of Lipitor to add Rs 25-30 a share to its earnings during its 180-days exclusive marketing period.

Mahida said if Ranbaxy does end up paying USD 500 million as penalty, then it would wipe out earnings from the Lipitor generic launch.

Other analysts like Chirag Talati of Espirito Santo Securities feel the penalty will hurt its balance sheet, while shaving off as much as Rs 60 a share from its EPS.

"Ranbaxy has entered into the consent decree and this would translate into an impact of close to Rs 60 per share for Ranbaxy. But importantly, it will strike its balance sheet as it would take the net debt situation to USD 750 million. The provision that has been set aside is on the higher side, as we were looking at close to USD 300-400 million," Talati told CNBC-TV18.

Talati expects regulatory costs will be overloaded on Ranbaxy for the next few years.

At 11:30 hrs, Ranbaxy shares were trading down 2% at Rs 387 on NSE.