Stock Review: Ranbaxy Labs

For investors of Ranbaxy Labs, it has been a rough ride. The drugmaker has encountered a series of setbacks and its stock has been pummelled.

The firm's problems have been compounded by Mylan, a leading global generic company, suing the US Food and Drug Administration in an attempt to block Ranbaxy from exclusively launching the generic of Lipitor – an anti-cholesterol drug of Pfizer. This will add to the uncertainty over the most-awaited generic launch from the company and which will also be quite lucrative.

Lipitor is the world's largest selling branded drug with a market size of $8 billion in the US. Its patent is likely to expire in November and Ranbaxy has claimed that it is entitled to the 180-day marketing exclusivity as a reward for being the first to challenge the Lipitor patent. In its court complaint, Mylan has said that since Ranbaxy presented false and unreliable data from its manufacturing site in Paonta Sahib, its first-to-file application for securing exclusivity to launch the generic should not be cleared by the US FDA. Instead, all other generic-drug companies should be allowed to enter the market as soon as the patent expires.

Mylan's move has a lot of ramifications for Ranbaxy. The generic launch of Lipitor is the biggest opportunity for Ranbaxy and may help it earn $500-600 million in sales. Following its December quarter results, many brokerages downgraded the stock considering it expensive due to its disappointing performance. Now, with uncertainties over its ability to cash in on the Lipitor opportunity, a 7% drop in the stock on Monday didn't come as a surprise. The stock trades at 12 times its consolidated earnings for the past one year.

Even if the Mylan case doesn't hold ground, Ranbaxy now faces the threat of Lipitor's generic launch meeting the same fate as the generic Aricept. Despite exclusively launching generic Aricept in December 2010, Ranbaxy reported higher-than expected price erosion of the generic citing pricing pressures. This could be due to Ranbaxy's image having taken a knock due to the uncertainties relating to efforts to sort out issues with the US FDA on its two manufacturing facilities. It may not be a surprise if the stock slides further.