Ranbaxy plunges 30% on third FDA ban; US business in trouble

Shares of Ranbaxy Laboratories (Ranbaxy), the nation’s biggest pharmaceuticals firm in terms of sales revenue, tanked 30.27% or Rs138.40 on Monday in Mumbai, the biggest fall this month so far, on news that the US drug regulator, the Food and Drug Administration (FDA), had last Friday issued an import alert on its Mohali plant in north India.

The FDA ruling triggered downgrades by various brokerages, savaging the stock and wiping out Rs5,856 crore of shareholder wealth (read market value) on BSE.

The Mohali facility is Ranbaxy’s third unit to be hurt by the FDA concerns about good manufacturing practices, after its manufacturing facilities at Paonta Sahib in Himanchal Pradesh and Dewas in Madhya Pradesh were subjected to similar scrutiny in 2008.

Meanwhile, shares in drug-maker Strides Arcolab fell nearly 4% after the company management said its  Agila Specialties unit had received a warning letter from the FDA after its inspection by the regulator in June.

Ranbaxy said on Monday it did not receive any FDA import alert. A company spokesperson said, “We are seeking information.”

However, late on Monday, the FDA confirmed the import alert, saying the development may see US officials detaining the Mohali unit’s products at the country’s border. The firm will remain on the import alert until it complies with the US standards for drug manufacturing (known as current good manufacturing practices or CGMP), the FDA said.

The alert dims hopes of incremental first-to-file (FTF) launches of Diovan and Valcyte which were to be launched from Mohali.

“Though we remain vary of FTF approvals, we believe Ranbaxy could have site-transferred the same to the Ohm facility as an alternative strategy,” said Perin Ali, pharma analyst at Edelweiss Securities.

In September and December 2012, FDA inspections identified significant CGMP violations at the Mohali facility, including failure to adequately investigate manufacturing problems and failure to establish adequate procedures to ensure manufacturing quality.

Under the consent decree, the FDA said Ranbaxy is prohibited from manufacturing FDA-regulated drugs at the Mohali facility and introducing the unit’s drugs into US inter-state commerce, until the firm’s methods, facilities and controls are CGMP-compliant.

The regulator suggested Ranbaxy to hire a third-party expert to conduct a thorough inspection of the Mohali facility.

The latest import alert comes a little over two months after Ranbaxy initiated an exercise to highlight specific steps being taken to strengthen its quality standards. As a result, the stock had gained a little over 36% since July 4 (see chart), only to surrender most of it on Monday.

The Mohali unit accounts for around 50% of Ranbaxy’s incremental products and 36 abbreviated new drug applications (ANDAs) filed in the US. Not surprisingly, analysts cited the import alert while downgrading the stock on Monday, saying it limits Ranbaxy’s potential for margin expansion from higher asset utilisation.

For instance, Rahul Sharma and Amey Chalke, pharma analysts at Karvy Stock Broking, said the import alert is a major negative.

“We believe this would take a very long time, considering the past record of consent decree. We have reduced the number of FDA approvals to two in the current year from ten previously and from 15 approvals in 2014 to five.”

Being relatively new, the Mohali plant does not yet run to full capacity. However, most of the company’s new drugs were slated to be made here.

The Mohali plant is crucial for Ranbaxy’s future growth. The company filings in the last three years were from Ohm, its wholly owned arm in the US, and Mohali, and were worth around $6 billion in brand value.