'Hold' ratings for Ranbaxy Laboratories Ltd over US FDA concerns: Edelweiss

Updated: Jan 14 2014, 15:05pm hrs
Ranbaxy labRanbaxy Laboratories has received Form 483s with certain observations for the Toansa plant.
The Ranbaxy Laboratories Ltd has received Form 483s with certain observations for the Toansa plant (API facility) on January 11, 2014, post the facilitys inspection by US FDA. We believe, this development will not impact current API production/supplies from the facility and there is no earnings impact.

Also, it is difficult for us to assess if the 483s could lead to further action by US FDA (warning letter or import alert) in the absence of information on the severity of observations. However, it is a negative development and will weigh on the stock price given that Toansa is a critical API manufacturing facility. Maintain hold.

The Toansa API facility is critical for the company as it is the sole plant catering to two thirds of its captive API requirements for the US. Moreover, some of the first to file (FTF) opportunities (Diovan, Valcyte, Nexium) may also be dependent for API supplies from this facility.

However, issuance of 483s does not impact the companys current business (US revenue: $400m plus), given that manufacture and supply will continue uninterrupted. Ranbaxy will respond to FDA observations within 15 days as per normal procedure and will await the agencys response. However, the nature (Warning Letter or Import Alert) and timeline of any further action by US FDA is uncertain and also difficult for us to predict in light of limited information available on the current 483s.

Our target price of R335 values the stock at 14x September FY15E EPS, significant discount to peers, given concerns over manufacturing issues and longer time line of FDA resolution. We have a HOLD/Sector Performer recommendation/rating on the stock.