USFDA settlement to hit Ranbaxy by Rs 60/sh: Espirito Santo

Ranbaxy Laboratories said it has reached a settlement with the US Food and Drug Administration while setting aside USD 500 million to address its potential liability from a separate US Justice Department investigation.

Speaking to CNBC-TV18, Chirag Talati of Espirito Santo Securities said, the move is likely take Ranbaxy's debt up to USD 750 million after the settlement. "This will translate into an impact of Rs 60 per share on Ranbaxy," he added. 

However, Talanti said, the development is a sentiment positive and one can expect near-term strength in the counter. " The fair value for Ranbaxy is close to Rs 460 ." 

Q: What do you make of this development? What does it mean for the stock?

A: 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.

The press release is still a bit vague because all it says is that Ranbaxy will show its capabilities in data integrity and CGMP compliance as a part of the consent decree. We don't know whether products will review immediately from both the facilities particularly for the Paonta Sahib facility which has been under significant question mark.

At last conference call management did mention that they expect to take up the US run rate to USD 400 million from current USD 300 million post FDA resolutions. But what happens because of the consent decree is that regulatory and compliance cost will not disappear immediately. If you look at the past trend of the 25 consent decrees that were signed by the FDA in the last decade, only three have been taken off at this point in time.

So, one would still expect regulatory cost to be overloaded on Ranbaxy for the next few years. Overall it is sentimentally positive and it removes the big overhand from the stock. Importantly it should enable Ranbaxy to timely launch all it's upcoming first to fill opportunity. However, the key for Ranbaxy still remains its new product flow in the US and ability to rapidly scale its filings. But we are still short of details over there, so we look to see what the management has to say before taking a firm call. Sentimentally, it is very positive and removes a big overhang on the stock.

Q: From this level of Rs 395 what kind of upside can you justify?

A: We are looking at around Rs 460 as a fair value on the stock. Some of this will be saved up because of the penalty that has been set aside. But to look at an upside from more than Rs 460 is difficult to justify, until we get clarity on the kind of stabilised run rate that one can keep from Ranbaxy in a steady state environment.