Ranbaxy Labs Nitrofurantoin recall poses additional setback

Over the weekend, Ranbaxy announced the voluntary recall of Nitrofurantoin capsules (Sales of US$4.1 mn and TRx of 0.56 mn units in 2008) from the US market. Ranbaxy believes the recalled drug (an antibiotic for the treatment of urinary tract infections) is “unlikely to produce any serious adverse health effects” implying a Class III FDA classification.

Ranbaxy’s recall of Nitrofurantoin capsules is the second product recall, following the Gabapentin recall in November 2007. In this instance, Ranbaxy has stated that few lots of Nitrofurantoin were not in conformity with approved lab specifications. It says that the recalled product is unlikely to produce any serious adverse effects.

Recall costs vary depending on the extent of the recall and the recall points in the distribution chain. In this instance, Ranbaxy has decided to recall all the lots and we estimate Nitrofurantoin to have progressed into the US retail chain.

Goldman Sachs has a SELL rating on the stock with a 12-m Target Price of Rs118 (based on 9X 2010E base).