Goldman Sachs: Ranbaxy -Sell

Aricept “sole” exclusivity a surprise, raise TP; maintain Sell


What's changed
On September 21, the US FDA announced that Ranbaxy would have sole
180-day marketing exclusivity for selling generic Aricept in the US. The
FDA order prohibits Teva from launching Aricept during the exclusivity
period. Aricept had LTM sales of $2.5 bn in the US. We expect Ranbaxy to
launch the drug post the patent expiry on November 25, 2010 with most of
the incremental benefit accruing in CY11. Hence, we raise our CY11E by
35% and fine tune our CY10E/CY12E EPS by 3%/4%.
Implications
Aricept sole exclusivity for Ranbaxy is better than our expectation, as we
had anticipated shared exclusivity for Ranbaxy with Teva. In our view, sole
exclusivity will reduce price erosion and allow Ranbaxy to gain higher
market share before competition sets in after the 180-day period. We
expect 6-8 players to launch post exclusivity. We value Aricept opportunity
at an NPV of Rs 17/share for Ranbaxy, assuming peak market share of
50%.
Despite the unexpected upside from Aricept, we maintain our Sell rating
on Ranbaxy, as we believe the stock is expensive at current levels. On our
base business estimates, stock is trading at a 134% premium on CY11E P/E
to domestic peers. We also look forward to further clarity on the resolution
of ongoing FDA/DoJ manufacturing issues. Recently, mgmt suggested
there would be substantial resolution of the issues in the next few months.
Valuation
We raise our 12-m Director’s Cut-based TP to Rs376 (from Rs353), based
on our valuation of the base business (Rs306) and NPV of Aricept
exclusivity, Lipitor and Nexium settlements (Rs70). Our target price implies
a CY11E P/E multiple of 36X, vs. the domestic sector at 19X.
Key risks
Earlier-than-expected resolution of FDA issues.