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Ranbaxy Laboratories (RBXY)
Pharmaceuticals
Aricept approval secures earnings upside from FTF pipeline—already factored in.
Key points: (1) Aricept has been approved after successfully switching the site from
Dewas/Ponta Sahib to Ohm Laboratories. (2) After the exclusivity ends the market
would be open to other players as well (Sun Pharma has already announced tentative
approval). (3) FDA flexibility on allowing a site switch augurs well for the eventual
monetization of Lipitor. Upside from this opportunity is already built into our estimates.
We therefore retain our estimates and reiterate a SELL on Ranbaxy.
Background to the Aricept approval
Ranbaxy had a first-to-file status on Aricept. After Teva’s approval status was switched from
approved to tentatively approved on September 22, Ranbaxy became the sole claimant to the
Aricept opportunity. With Aricept being successfully launched in the US market, it looks reasonably
certain that earnings upside from Ranbaxy’s FTF pipeline is secured. The concerns on the ability of
Ranbaxy to monetize some of the other first-to-file opportunities, most notably Pfizer’s
Cholesterol-reducing drug Atrovostatin, are allayed post the commercial launch of Aricept.
Aricept to be a three-way market
Aricept is a six-month exclusivity for RBXY that got triggered on November 25. Three companies,
including Pfizer, Greenstone (AG) and Ranbaxy, will sell in the first six months after which the
market will be open to five other generic players implying steep pricing erosion. Gains from
Aricept, therefore, will not extend meaningfully beyond May 2011E, in our view.
Meaningful opportunity but priced in: Assumptions intact
We believe that FDA by allowing a site switch allows unlocking of a meaningful opportunity for
Ranbaxy. We also believe that this will allay existing doubts over Lipitor monetization. However,
we believe that the stock at current levels is pricing in upside from all five FTF products now
(Lipitor, Nexium, Caduet, Actos and Aricept) and counting on these one-off opportunities to be
sustainable. We continue to value these opportunities on a non-recurring basis. Our NPV-based
valuations of these Para IV opportunities imply a value of Rs100/share.
Our estimate from Aricept upside is US$155 mn of profits in six months
We believe that Aricept is a US$155 mn profit opportunity for Ranbaxy (see exhibit). A successful
commercial launch also allays concerns on other FTFs. Adjusted for one-time opportunities, the
stock trades at 32X one-year forward earnings (50% premium to other frontline peers). We
reiterate our SELL rating on the stock.
Aricept in the bag—Lipitor almost
Aricept is a 6-month exclusivity for RBXY that got triggered on November 25. Three
companies, including Pfizer, Greenstone (AG) and Ranbaxy, will sell in the first six months
after which the market will be open to five other generic players implying steep pricing
erosion. Gains from Aricept, therefore, will not extend meaningfully beyond May 2011E, in
our view. We believe that despite the presence of authorized generic version, Ranbaxy can
garner US$155 mn of profits (50% price erosion, 50% market share) in six months. We
expect authorized generic during the six months and, therefore, add Aricept to NPV of FTF
opportunities which now comprises five products—Lipitor, Nexium, Caduet, Actos and
Aricept.
Positive news flow on FDA resolution doesn’t alter the investment debate
We believe that FDA’s accommodative stance by letting Ranbaxy switch its filing site twice to
Ohm Laboratories augurs well for a final resolution of the FDA/DOJ issue. Although
commentary on this issue continues to be confusing, we believe that the upside from all
exclusivites is reasonably secure and accounted for in the stock price post Aricept’s
successful switch. This is the second instance of FDA allowing Ranbaxy to switch from a site
under regulatory scanner. The company earlier had successfully switched the site for
valacyclovir hydrochloride from Dewas to Ohm. Adjusted for one-time opportunities, the
stock trades at 32X one-year forward earnings (50% premium to other frontline peers). We
reiterate our SELL rating on the stock.
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