Citi: Ranbaxy - 4QCY10 Lower on Subdued Aricept Sales

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Ranbaxy (RANB.BO) 
 4QCY10 Lower on Subdued Aricept Sales 
 
 Lower on subdued Aricept sales — Generic Aricept sales appear to be scaling
up slower than we forecast, leading to a weaker than expected 4Q. We estimate
4Q & CY10 base biz EBIDTA margins at c8% & c10% respectively. The margin
trend is healthy, albeit slower than expected, & we see steady improvement going
forward. CY11 topline guidance (Rs84bn w/o Lipitor) is in line with our estimates.

 4Q: weaker on lower Aricept — Ranbaxy reported sales, EBIDTA & adj PAT of
US$463m, US$53m & US$26m in 4Q – lower than expected on slow ramp-up in
generic Aricept sales (Ranbaxy has c30% MS @ 70% price erosion). Base biz
was largely in line, with estimated sales & EBIDTA margin of cUS$438m & c8%
respectively. Adj PBT was flat QoQ, while adj PAT dipped c35% on higher tax rate.
 CY10: A turnaround year — Ranbaxy registered robust sales growth (+15%) &
healthy profitability, as restructuring efforts started bearing fruit. EBITDA margins
(+1075bps), reported income (+404%) & adjusted PAT (Rs12bn vs. loss of
Rs330m in CY09) improved. We estimate CY10 core margins at c10% (c5.9% in
CY09). It also monetized 3 FTFs: Valtrex, Aricept (launch) & Flomax (settlement).
 Business update — 1) India grew by c17% YoY, adjusted for one-time tender
sales in CY09, aided by field force expansion & new launches; 2) North America
(+58% over CY09) on exclusivity sales (Valtrex & Aricept) & stable base biz sales;
3) EU growth muted (INR: -4%, US$: +1%) on currency volatility, channel issues &
planned scale down in some markets; 4) Asia-Pac (ex divested biz) grew c8%
YoY; 5) LatAm (+10%), Africa (+16%) and CIS (+11%) also performed well.  
 Other takeaways — 1) No update on the FDA / DoJ issues; 2) Won ARV tender in
South Africa (cUS130m) to be executed over CY11-12; 3) Forex derivative
contracts O/S: cUS$847m (cUS$1bn at end Dec ’09); 3) Base biz sales in N.
America at cUS70-80m/quarter; 4) Gross debt at cUS$960m, cash at cUS$820m;
5) Nexium API supply to Astra has started, formulations supply to start in 2HCY11.


Ranbaxy
Valuation
We have a target price of Rs700 for Ranbaxy, comprising Rs545 for the base
generics business and Rs155 for the company's patent challenge pipeline. We
use EV/Sales to value the core business as we believe Ranbaxy's current
profitability is skewed downwards by the unabsorbed overheads at Paonta
Sahib & Dewas as well as the high legal & consultancy charges being incurred
towards resolving the FDA issues at these plants. We value the core generics
business (excluding exclusivity upsides) at 2.4x Mar 12E recurring sales, which
is at a 10% discount to the median of the band in which it has traded over the
past 8-9 years. We believe this discount is warranted given the uncertainty in its
business following issues with the US FDA. We value the company's patent
challenge pipeline using a probability-adjusted NPV approach and applying a
discount rate of 15%.
Risks
We rate Ranbaxy Medium Risk as opposed to the Low Risk rating as
suggested by our quant-based rating system, which tracks 260-day historical
share price volatility. While there are signs of recovery in the business, we
believe risk is still on the higher side due to the uncertainty related to its issues
with the US FDA / DoJ. The key downside risks to our target price include: 1)
Slower than expected resolution of the US FDA issues; 2) Setbacks on its
already monetized patent challenge pipeline, in form of litigation wins by other
generic companies or delay in approvals/launches; 3) Intensifying pricing
pressure in the US and European markets.