According to a press report, the Directorate General of Drug Administration (DGDA) of Bangladesh temporarily restricted the import of raw materials from two Indian companies – Saraca Laboratories Limited and Dr Reddy’s Laboratories – for the production of Ranitidine (an anti-ulcerant drug). The authorities have imposed a temporary ban on the production and sale of Ranitidine using the raw materials from these two companies as it may contain a potential carcinogen named N-Nitrosodimethylamine (NDMA).
We expect minimal impact on our coverage
Even though Ranitidine generates 1.7% sales of the pharma industry in Bangladesh, the temporary restriction on these two sources will have a minimal impact on our coverage for the following reasons:
- First, pharmaceutical companies import Ranitidine hydrochloride, the raw material, from four major suppliers. The regulators imposed restriction on only two of the suppliers. So, only a part of the inventory will be subject to this restriction. There is no restriction to produce the drug with the raw materials of other suppliers. Therefore, the production and distribution of Ranitidine products will continue.
- Second, the peak season for Ranitidine is during the month of Ramadan (May-June) when people observe day-long fasts; consumption slows down in the following months thereafter. So, in September, the level of inventory and Ranitidine products in circulation is moderate to low.
- Third, pharmaceutical companies will test the existing raw materials and finished products in any internationally acclaimed laboratory to detect potential NDMA contamination. If there is any contamination, they will discard the existing inventory as well as the products in circulation. In such a case, there will be an inventory loss.
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We reiterate our Buy recommendations on our covered stocks
We believe it is a good time to invest in Bangladesh pharmaceuticals as the stocks in our coverage are trading at very cheap multiples compared with their expected earnings growth. BXPHAR and SQUARE, especially, appear cheap as they are trading at 10.1x and 12.3x FY20e forward PE, respectively, compared with the expected 3Y earnings CAGR of c18% and c16%, respectively. See our recommendations summary below.
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