Anand Rathi: Ranbaxy Laboratories Abundant opportunities; initiate with Buy

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Ranbaxy Laboratories
Abundant opportunities; initiate with Buy
We initiate coverage on Ranbaxy with a Buy rating and target
price of `658. Ranbaxy is well placed to witness turnaround in its
base business, reap synergistic benefits of parent Daiichi
Sankyo’s (Daiichi) hybrid business model and significant cash
flows from para IV opportunities.
 Expect turnaround in base business. We expect Ranbaxy’s base
business (ex para IVs) to turnaround (12.2% CAGR in CY09-12e)
led by stabilising US business (+US$250m annual revenue), strategic
focus on Indian business, commencement of Nexium supply to
Astra Zeneca and synergistic benefits from Daiichi integration.
 Para IVs to provide significant cash flows. Ranbaxy has some big
products (such as Lipitor, Caduet, Nexium, Aricept, Actos) with para
IV filing for the next few years, which would provide significant onetime
cash profits. We value such opportunities at `140.
 Improving operating efficiency. We expect 1,040bps margin
expansion in base business over CY09-12e, driven by various costcutting
measures and R&D savings of US$20mn post transfer of
innovative R&D to Daiichi.
 Valuation and risks. We value Ranbaxy at `658 based on 20x
CY12e base business earnings and `140 for para IV pipeline.
Resolution of US FDA issue would provide upside to our
estimates. Risks: Failure to get approval for para IV products;
regulatory hurdles (such as delay in approval or US FDA warning).