Why Ranbaxy's gain from Lipitor deal is short-lived

After touching a low of Rs 412 on 24 November, 2011, Ranbaxy in a span of three trading days has touched a high of Rs 464. The sharp move is attributed to an expectation that the company will be able to launch the generic version of world's largest selling drug, Lipitor.

Ranbaxy, a unit of Japan's Daiichi Sankyo plans to launch a generic version of Pfizer's top selling cholesterol lowering drug, Lipitor, patent of which expires on 30 November, 2011. The drug had a global sales of $10.7 billion last year.

[caption id="attachment_143460" align="alignleft" width="380" caption="Malvinder Singh, chief executive of Ranbaxy. Reuters"][/caption]

Though Ranbaxy has the 180 days exclusivity for sale of the generic version of Lipitor, it is still not been given the right to sell the product in US. This is because quality control and data reporting issues by Ranbaxy have delayed the approval from the US FDA (Food and Drug Authority).

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Recent news reports suggest that the company is likely to enter into an arrangement with the FDA by paying a penalty of $350-$400 million. This move will allow the company to launch the product in the US markets.

However, assuming that the company is able to launch the product in the US markets, upside from current level looks limited. This is because Pfizer itself will be selling the product directly to the clients at a substantially reduced price.

Further, Pfizer has appointed generic pharma giant Watson as 'authorized generic', whereby the later can sell the product at generic prices.Watson has also given a guidance of $100 million per quarter from Lipitor, roughly the same which analyst are attributing to Ranbaxy.

Apart from these, the cost of getting the right to sell from FDA (around $350-$400 million) will eat into Ranbaxy's profit. The company is expected to do a business of $650 million during the six month period of exclusivity.

Only if the company sells the generic version of Lipitor, will there be an upside potential in the stock, everything else is already factored in the current share price of Rs 432, which discounts 2012 earnings by nearly 25 times.