Mylan has sued the US FDA for inaction and failure to disclose the status on 180-day marketing exclusivity relevant to Ranbaxy's ANDA on generic Lipitor.

While it would be difficult to comment on US FDA action but any denial of 180-days exclusivity (a rare possibility) to Ranbaxy for generic Lipitor would shave-off Rs36/share from our target price (Rs480/share) and provide huge negative sentiment for the stock. However, we continue to believe that Ranbaxy would be able to monetize generic Lipitor exclusivity through Ohm labs (as seen in case of generic Aricept). Further, we are cognizant of the competitive scenario in generic Lipitor (Watson-AG) during the exclusivity period and have factored in only Rs36/share. We continue to maintain our HOLD rating on the stock in spite the steep correction as risk-reward is still not favorable.

Unexpected move and knee-jerk reaction

Mylan has sued the US FDA for inaction and failure to disclose the status on 180-day marketing exclusivity relevant to Ranbaxy's ANDA on generic Lipitor. Mylan has contested that US FDA has failed to decide whether it will enforce the terms of its AIP against the generic Lipitor ANDA filed by Ranbaxy (assumed from Poanta Sahib facility). As any such decision by US FDA could result in early approval of pending ANDAs by other generic filers and would permit generic competition at the earliest possible date (June 28th 2011).

Possible outcomes

There could be following possible outcomes to the much awaited generic approval of the biggest blockbuster drug: 1) Ranbaxy and US FDA works closely to assess the validity of the data contained in the generic Lipitor ANDA assuming its filed from Paonta Sahib facility 2) Transfer of generic Lipitor ANDA to other facility (Ohm Labs) 3) Cancellation of FTF status of Ranbaxy on generic Lipitor.

We believe transferring of generic Lipitor ANDA to other facility (Ohm labs) as the highly possible outcome (as seen in case of generic Aricept). We see a low probability for US FDA working closely to assess the validity of the data (from Poanta Sahib facility) due to constrain on resources at the FDA front. Besides, cancellation of FTF status of Ranbaxy on generic Lipitor by US FDA seems a rare possibility as it was a pre-MAA filing.

RECOMMENDATION

We continue to maintain our HOLD rating on the stock with a target price of Rs480 in spite of 14% correction in last one month as we believe resolution of US FDA issue would be the only trigger going ahead as base business margins continue to languish between 7-8%. We value the core business at Rs372/share (22x CY12E recurring earnings) and the FTF pipeline at Rs108/share resulting in 18-months SOTP based target price of Rs480.