Ranbaxy Laboratories-Aricept approved - upgrade to Outperform: Macquarie

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Ranbaxy Laboratories- 

Aricept approved - upgrade to 

Outperform

Event
 Ranbaxy received FDA approval for its ANDA for generic Aricept and is
preparing to launch shortly. This is the fourth FTF monetised despite the
ongoing FDA issues (Imitrex, Valtrex, Flomax and now Aricept) in a span of
two years, and provides credence to management’s view that RBXY will be
able to “monetise” all its FTF assets.


 The recent weakness (related to uncertainty around the monetisation of
Aricept FTF exclusivity), provides an entry opportunity, in our opinion. We now
estimate RBXY’s value of the FTF franchise at Rs156/sh (earlier Rs110/sh)
and upgrade the stock to Outperform, from Neutral, with a revised TP of
Rs650 (up from Rs570).

 RBXY continues to indicate the potential for a “comprehensive settlement of
issues” with the FDA and DoJ. We believe such a settlement within the next
six to nine months, even with a likely penalty payment (our base case
estimate is US$250m), would be a favourable outcome. Inability to resolve
FDA and DoJ related issues, or an exorbitantly high penalty payment, remain
the key risks to our Outperform rating.

Impact
 Aricept opportunity: RBXY is eligible for the sole exclusivity. Greenstone will
launch the Authorized generic for this product. We estimate Aricept to
generate US$275m in sales and contribute Rs18 to CY11E earnings.

 Emerging market focus has started yielding results, with an acceleration in
sales in key markets given substantial investments in these geographies.
Core base business margins should expand, given the restructuring of
operations in select geographies, and once the FDA related overhang is
behind RBXY.

 Bull case scenario: We will 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 six to nine months
with a likely penalty payment (~US$100m), we see potential upside of
approximately 45% for the stock.

Earnings and target price revision
 We have raised our earnings for CY11/12 to Rs19/26 from Rs18.5/24 driven
by a higher US sale assumption (higher FTF product sales post expiry of
exclusivity) and higher interest income given the FTF cash generation. We
raise our TP to Rs650 (earlier Rs570) due to higher earnings and FTF value.

Price catalyst
 12-month price target: Rs650.00 based on a Sum of Parts methodology.
 Catalyst: Comprehensive settlement of issues with FDA & DoJ within a year.

Action and recommendation
 After adjusting for the FTF exclusivity value RBXY trades at 15x CY12E
earnings. We value RBXY’s base business at 20x CY12E earnings in line with
the sector average and add Rs156/sh for the FTF franchise. We build a
US$250m penalty payment risk into our target price. Upgrade to an
Outperform rating with a target price of Rs650.