Food and Drug Administration dampener

The US Food and Drug Administration (USFDA) has sent a warning letter to Ohm Laboratories, Ranbaxy’s US unit, citing violation of manufacturing norms at its plant.
This is not a pleasant development for the company. More so considering the warning comes at a time when exports from two of Ranbaxy’s manufacturing sites in India (Dewas and Paonta Sahib) continue to be suspended by the US regulator.

Analysts, however, feel the financial impact of the warning would not be substantial.
According to Prashant Nair and Akshay Rai of Citigroup, revenues from the plant account for less than 10% of Ranbaxy’s US revenues. “We see a worst case impact at about 2-3% and around 5% of core sales and EPS (earnings per share) respectively, and believe the FTF (first to file) pipeline appears secure,” Nair and Rai wrote in a note to clients on December 24.

Major FTFs seem to have been filed from other Ohm plants and hence new risks to this pipeline or its valuation look negligible. Sales from the Ohm plant are expected to continue. Approvals are likely to be on hold, but what offers comfort is that there are not many major filings pending approval from this plant.

For the quarter ended September, Ranbaxy’s results were better than expectations at the net profit level, riding on exceptionally high other operating income. Net profit stood at Rs 116.6 crore against a loss of Rs 394.5 crore in the year-ago quarter. Profitability was helped by sharp control on selling, general & administration expenses besides other operating income of around Rs 170 crore, which included Rs 75 crore in licensing income and Rs 50 crore from scrap sales. Revenues declined 8.8% year on year.

Ranbaxy’s stock has outperformed broader markets in the last one month, increasing 23% to Rs 520.05 per share as compared with a 1% gain in the BSE Sensex. The US warning letter is likely to affect sentiment for the stock. But, analysts feel investors could use this opportunity to enter the counter.