Ranbaxy: Forex upside – Aricept remains key::Macquarie

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Ranbaxy Laboratories
Forex upside – Aricept remains key
Event
 Ranbaxy reported 3QCY10 sales of Rs18.8b (up 10% YoY, our estimate was
Rs18.4b) and PAT of Rs3.1b (up 91% YoY, our estimate Rs1.9b). Adjusted
EBITDA for 2QFY11 was Rs 2b with a margin of 10.7%. Maintain Neutral with
a target price of Rs 570.


 A large part of the variance can be allocated to forex gains of Rs2.5b and
one-off provisions of Rs1.1b (Rs 460m for simvastatin recall, Rs184m for
valcyte settlement, Rs200m write-off for discontinuing development of inlicensed
product and Rs 250m or diminution in value of long-term investment).
 The new CEO continued to indicate the potential for a “comprehensive
settlement of issues” with the FDA and DOJ, however, he did not give a
specific time-line. (Last quarter out-going CEO had indicated time-line of 3 to
6 mos.) We believe; such a settlement, even with a likely penalty payment,
would be a favourable outcome and a key upside risk to our Neutral rating.

Impact
 Emerging markets recorded sales of US$238m (up 5% YoY) and contributed
59% to Sales. Africa sales were down 6% YoY. However management
expects products launched from a new facility in 4QCY10 to help drive growth
in the region. India grew by 18% YoY, with project Viraat starting to pay
dividend. We expect India to grow at high-teens over the medium term.
 Developed markets sales were US$145m (up 36% YoY). US sales of
US$86m were ahead of our US$60m estimate (driven by higher Valtrex
sales). Europe was down 10% impacted by forex and lower sales in France.
 Aricept launch on 25 Nov, key data point: RBXY is eligible for sole
exclusivity. Exclusivity would remain parked until Ranbaxy launches or a court
decision in favour of other generic players on the latter expiring patent is
delivered. This product if launched can easily add Rs 20 to CY11 EPS.
 Bull case scenario: We continue to take a cautious view until the FDA
settlement is done. However, in a scenario where a comprehensive settlement
with the FDA and DoJ is possible within the next 3–6 months with a likely
penalty payment (<US$100m), we see an upside of 25% to 30% for the stock.

Earnings and target price revision
 No change

Price catalyst
 12-month price target: Rs570.00 based on a Sum of Parts methodology.
 Catalyst: 1) Aricept Launch 2) Comprehensive settlement with FDA & DoJ

Action and recommendation
 Given the recent run-up, after adjusting for risk-adjusted FTF exclusivity
value, RBXY trades at 20x CY12E earnings, in line with the sector. A
favourable DoJ resolution remains the upside risk to our Neutral call.