Drug maker may post forex loss of $200 mn in September quarter because of wrong-way bets on rupee hedges

Mumbai: Ranbaxy Laboratories Ltd may have made its peace with the US—representing a market of nearly $1 billion—by settling cases with the US department of justice, but its woes are unlikely to end. The drug maker may post a foreign exchange loss of as much as $200 million in the September quarter because of wrong-way bets on currency hedges, analysts say.
That loss may take its cumulative loss on account of derivatives to over $1 billion.
India’s largest drug maker signed derivative contracts worth about $4 billion in 2006 to hedge risks, but has had to provide for losses in every quarter since 2008, whenever the rupee has dropped below the hedge level.
The cumulative derivative loss was $800 million as of 30 June, Ranbaxy president and chief financial officer Inderjit Banerjee said in an interview last week. “The remaining loss will continue reflecting in the books at least for the next two years if the rupee remains sliding,” he said.
The sharp fall in the rupee over the last two months has increased the amount to over $1 billion, analysts said.
Coupled with a $550 million foreign currency loan taken to fund acquisitions, including that of Romania-based Terapia SA for $324 million in 2006, the drug maker’s margins will continue to be under pressure for at least the next 8-10 quarters, the analysts added. Since 30 June, the rupee has fallen 13.7% against the dollar.
Ranbaxy had taken the hedges in the Rs.41-42 a dollar range in 2006 with the derivative contracts, said an analyst who did not want to be named. “The forex loss in the first quarter of fiscal 2012 was Rs.345 crore on hedges, wherein the rupee had depreciated about 4% during that period. For every 1% depreciation of rupee, the company’s forex loss comes to around Rs.90 crore,” added the analyst.
A 13.7% depreciation in the rupee since 30 June, the analyst said, translates to cumulative forex losses of about $1.04 billion for Ranbaxy.
For Ranbaxy, the outstanding amount of foreign currency loan (excluding the maturity every month) has a large bearing on the interest cost, said a consultant from a foreign corporate advisory firm who did not want to be named.
In the past few quarters, accrued interest has fallen while other income has risen, offsetting the loss from borrowings (pre-dominated in dollars), the company’s financial statements show.
“But a sharp decline in rupee will again take away this benefit,” added the consultant. The rupee recovered over 3% on Thursday to close at 66.60.
“In spite of the improvement in operating profitability led by first-to-file sales (and) fixed overheads on the US food and drug administration (FDA) resolution, Ranbaxy’s wrong bets on derivatives remains a pain area for the company,” said Sapna Jhavar, a senior analyst with Reliance Securities Ltd, in a report in May.
First-to-file opportunity is a high-margin business option for a generic drug maker in the US when it seeks the first approval to sell a generic drug in that market with six-month exclusivity.
This mechanism is known as “Para-4” filing—the generic drug maker has to file for marketing approval with FDA, either without infringing the rights of an already-patented drug, or to enable the launch of the low-cost drug immediately after the patent expiry.
As part of cost-saving measures, Ranbaxy has initiated cutting its workforce in some non-core areas, mainly in production and administration, besides reducing its focus on low-margin markets, including some overseas ones, according to two people familiar with the development. Both did not want to be named.
A company spokesperson declined comment on these developments.
Ranbaxy, which faced an import ban by the US drug regulator on two of its key export-oriented manufacturing facilities in India, is in the process of building parallel capacities in India and the US.

DCGI finds minor deficiencies in Ranbaxy inspection: Srcs

Sources indicate that the deficiencies noted during DCGI inspections are not serious enough to attract suspension charges

The much awaited report on the Indian Drug Controller’s (DCGI) inspections of Ranbaxy’ s manufacturing units has been partially prepared. Initial findings of the DCGI inspections have highlighted minor deficiencies in compliance to good manufacturing practices (GMP) at Ranbaxy plants, reports CNBC TV18 ‘s Archana Shukla quoting sources.

The inspections were at all India-based manufacturing units of Ranbaxy, with a critical focus on units at Paonta Sahib and Dewas. The scrutiny was triggered post Ranbaxy agreed to US DoJ felony charges and paid USD 500 million as settlement fine.

Pharma cos seek customised insurance for legal settlements Sources indicate that the deficiencies noted during DCGI inspections are not serious enough to attract suspension charges. Ranbaxy has been given a mnonth’s time to rectify the processes and respond to DCGI with their action plan.

The Drug Controller’s inspection team is now focusing on stability testing of Ranbaxy drugs. The team is currently collecting random drug samples from market and manufacturing lines to study efficacy & safety of drugs.
“In the last three years, we have made filings from Ohm and Mohali (the new manufacturing plants in the US and India, respectively). The filings from Ohm and Mohali are totalling around $6 billion of brand value at present,” chief executive Arun Sawhney said in a 13 August interview.
“The same shortcomings won’t be troubling the company in the future,” Sawhney said, adding that the company has invested $300 million in upgrading facilities, and employing consultants to impart “the correct skill sets”.
“I cannot undo what was in the past, but I can give the world an assurance of what Ranbaxy is doing today and will continue to do so in the future,” he said.
Ranbaxy shares fell 0.16% to close at Rs.417.90 per share on Thursday on BSE, while the benchmark Sensex gained 2.25% to end at 18,401.04 points. The BSE Healthcare index gained 1.62% to close at 8,825.01 points.

First-to-file launches are key triggers for RanbaxyThe FDA clearance for its 2 units, an overhang currently, should also help narrow the valuation gap with peers
Ranbaxy Laboratories has outperformed its peers and the broader benchmarks by a wide margin, gaining 50 per cent in August. However, it is still trading at a 30 per cent discount to its peers (Dr. Reddy’s and Sun Pharma). This gap, analysts believe, can narrow following the timely approval and launch of first-to-file drugs and if the company gets the go-ahead from the US Food and Drug Administration (FDA) to start production at two of its affected plants.

While it has substantial operations across the globe, the primary trigger for the recent up uptick in the stock has been improving growth visibility in its biggest market – North America – which accounted for 43 per cent of its 2012 (calendar year or CY) revenues. The biggest lever for base business margins in the coming quarters, according to Macquarie Research analysts, is the ramp up of acne treating drug Absorica, which can add about $100 million to the company’s CY15 earnings before interest, depreciation, taxes and amortisation (Ebidta). In fact, the latest numbers indicate the product continues to gain market share (at 14 per cent, up 140 basis points over the last month) and is the key growth driver for the firm’s US sales. At 14-16 per cent (CY13 and CY14), it is by far the biggest contributor to the earnings per share (among current basket of products in the US).

Macquarie Research in its recent report expects Ebidta run-rate to grow by over 150 per cent to reach $350 million by CY15. Margin improvement over the next couple of years is expected to be driven by its dermatology formulation sales, better asset utilisation after FDA issue resolution and operating leverage in emerging markets. The research firm pegs the target price for the stock at Rs 470.

The other trigger for Ranbaxy is the launch of first-to-file drugs, which give exclusive rights to market drugs in the US for a fixed period with limited competition. Over the next one year, the company will be banking on three such products – Diovan, Valcyte and Nexium. Diovan (controls high blood pressure) and Valcyte (an anti-viral) are expected to be launched by the end of 2013 and gross about $300 million in sales. Nexium, an antacid, is the largest opportunity for Ranbaxy with expected sales during the exclusivity period at $275 million and could be launched by May of 2014.

All three drugs could boost net profits to the tune of $400 million over the next two years. The follow-on sales (after the exclusivity period) are also likely to bring in steady revenues. Fortune Research’s Hitesh Mahida says Ranbaxy has carved out a significant market share in all its first-to-file launches (excluding Lipitor) after the exclusivity period, despite intensifying competition.