Kotak Sec: Sell Ranbaxy , Target Rs 340

Ranbaxy wins Aricept exclusivity, positive but final approval awaited. Following
the FDA’s decision to switch its response to Teva’s application to sell Aricept from
‘approved’ to ‘tentatively approved’, we believe Ranbaxy is the sole claimant to the
180-day Aricept exclusivity. We believe the market is not factoring in the risk of the
final approval not coming through. We add Rs17 on account of the NPV/share of
Aricept to FTF pipeline and also raise our estimates for the base business. We find the
stock overvalued and reiterate our SELL rating with a revised target price of Rs340
despite factoring in (1) complete recovery in India business, (2) savings in R&D spend in
CY2011E and (3) building in upside from Aricept.


Ranbaxy wins sole exclusivity for Aricept—size of opportunity becomes bigger but risks remain
Ranbaxy is the natural beneficiary of the setback to Teva’s Aricept exclusivity claim. As opposed to
our expectation of generic Aricept being a three-player market (Teva, Ranbaxy and the AG
version), now the market stands split between Ranbaxy and AG version. However, we believe that
a final approval could come only post (1) satisfactory resolution of the FDA issues, (2) potential site
switch or (3) monetizing this opportunity through a settlement with innovator.
We expect an AG version; 23 mg tablet is still a small portion of total market
Aricept registered sales of US$2 bn in US in FY2010. Given the overdependence of Eisai on this
drug, we believe (1) there will be an AG version for the drug during 180-day exclusivity and (2) the
23-mg tablet, a higher dosage version that was launched in July 2010 to counter generic entry,
constitutes a small portion of total Aricept sales. Generic companies including Ranbaxy have filed
for the 5-10 mg dosage.
We estimate Ranbaxy to garner US$155 mn of profits in six months from Aricept
With the presence of AG, we believe Ranbaxy can garner US$155 mn of profits (50% price
erosion, 50% market share) in six months. We add Rs17 on account of the NPV/share of Aricept to
FTF pipeline (5 products now—Lipitor, Nexium, Caduet, Actos and Aricept).
We maintain SELL with revised PT at Rs340 (from Rs255), revise base business EPS to Rs14.8
We revise our base business EPS to Rs14.8 from Rs12 earlier on account of (1) complete recovery
in the India business at15% sales growth and (2) savings of US$20 mn in total annual R&D spend
of US$100 mn post hive-off of NDDR division to Daiichi. We revise our target price to Rs340/share
on account of (1) Rs238/share base business value (16X CY2011E earnings) and (2) NPV of Para IV
patent challenge pipeline of Rs100/share (up Rs17/share on account of Aricept addition).