Citi on Ranbaxy:: Resolution of Regulatory Issues the Key

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Resolution of Regulatory Issues the Key
 Business Snapshot – Ranbaxy is a leading Indian pharma company, with a
strong international business complementing its market leadership in India.
It is one of the leading Indian companies in the US (with a combination of
plain vanilla generics and an impressive patent challenge pipeline) besides a
leading presence in emerging markets such as Africa and Latin America.
Recently Daiichi Sankyo bought out the founder shareholders – opening up
options for Ranbaxy to market the former’s products in emerging markets as
well as targeting the attractive generics opportunity in Japan. Its US
business has been affected due to regulatory issues at two of its
manufacturing facilities in India – the company is engaged in addressing
these issues.


 Latest Quarterly Performance – Topline grew 10% YoY, while adj EBITDA
margin was at c10%. Operating PAT (+48% YoY) was buoyed by lower tax
rate & higher other income. Growth picked up in India (+18%: higher field
force, new launches & greater focus) & N America (+66%: good sales of
Valtrex post exclusivity, generic Lipitor in Canada) & were steady in CIS
(+11%) & Romania (+20%). EU-ex Romania (-5%: loss of a wholesaler),
Asia Pac (-18%; divestment of China, Vietnam & Japan biz) & RoW markets
(-2%) were subdued. Cost-cutting, rationalization of markets & NDDR spinoff
offset higher spend on Indian field force & US regulatory issues.

 Key Catalysts / Issues – a) Progress on resolution of FDA issues at its
manufacturing sites in Dewas & Paonta Sahib; b) Further updates on its FTF
pipeline in the US – especially related to approval / monetization of Lipitor;
c) Tangible improvement in the Indian business, following the Project Viraat
initiative; d) Core business margin trends, driven by product / market
rationalization & synergies with Daiichi Sankyo; e) Update on efforts to tap
the Japanese generics opportunity

 Resolution to FDA Issues in Sight? — Over the past two quarters, Ranbaxy
has been indicating that it expects material progress toward a
comprehensive resolution of all FDA related issues in the next few months. It
seems that Ranbaxy is gearing up for a possible settlement with the FDA/DoJ
– this may involve some monetary penalty but would also remove the
overhang over the US biz & FTFs.

 Valuations: Not as Expensive as it Looks – Ranbaxy’s valuations have been
all over the place, given the several special situations that have come up
from time to time: viz. FDA issues, Daiichi takeover, large FTF oppys. While
P/E appears stretched (25 xCY11E core EPS), it does not reflect the value of
its FTF pipeline nor the fact that base biz margins are suppressed. With
evidence of base biz margin recovery & management’s confidence on
progress on FDA issues, we believe there is upside to its current EV/Sales
multiple of 1.8 x CY11E (adj for FTF pipeline value of Rs165/sh). Tangible
progress on the FDA front would be the key valuation driver.