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Ranbaxy Laboratories (RBXY)
Pharmaceuticals
Is Lipitor tainted? Through a complaint filed in a district court in Washington, Mylan
has filed a suit against the US Food and Drug Administration to block Ranbaxy
Laboratories’ exclusive rights to sell a generic version of Pfizer’s cholesterol pill Lipitor.
Significantly, Mylan has asked the court to compel the FDA to state publicly whether
Ranbaxy’s application ’is tainted by Ranbaxy’s misconduct’ and that therefore the
application must be denied and the 180-day reward voided. Excluding FTF, Ranbaxy’s
pipeline value is trading at 21X 2011E base business EPS. Maintain SELL with a target
prcie of Rs365
Recap – Lipitor case history
ƒ US FDA has invoked the ‘Application Integrity Policy’ on Ranbaxy, temporarily banning
products from its Paonta Sahib facility and withholding all ANDA approvals in 2009
ƒ Despite the FDA censure, Ranbaxy has been able to salvage value from its FTF pipeline –
Valtrex and Aricept generics were launched as a consequence of site switch and Flomax
generic opportunity was settled
ƒ Ranbaxy reached an agreement with Pfizer in 2008 to sell copies of the world’s bestselling medicine beginning November 2011
ƒ Ranbaxy claims it is entitled to 180 days of marketing exclusivity as a reward for being the
first to challenge the Lipitor patents. It has not yet received final regulatory approval on its
application to sell the copy
ƒ Under normal circumstances, no other generic filer can launch the product until Ranbaxy
triggers this exclusivity or FDA blocks the exclusivity of Ranbaxy except authorized generic.
Therefore, Mylan’s legal challenge, in our view, implies the possibility of a Mylan launch
despite the outcome on the status of Ranbaxy’s launch. Mylan and Teva were originally
expected to launch it after the exclusivity period.
Lipitor outcome - a key short-term catalyst
Successful monetization of Lipitor is one of the most awaited catalysts by the Street. Besides being
a significant opportunity - US$561mn contribution to sales and US$337 mn contribution to profits
- it will establish the direction/status of the FDA/DOJ issue. The acceptance of Mylan’s claim, in our
view, would highlight that all is not well with Lipitor given the filing site is not clear and would
induce additional competition for the drug once it comes off-patent even if Ranbaxy is able to sell
the drug (our base case). Higher competition could lower Ranbaxy’s market share and reduce
profitability from the specific opportunity. Lipitor currently constitutes (~10%) of our target price
and assuming a lower market share of 25% and a pricing erosion of 60% as opposed to 50%, the
target price would be negatively impacted by Rs20.
Focus likely to shift to base business
Although in the short term the stock is likely to be held hostage to news flow on Lipitor, in
the longer term we believe that the investor focus ought to shift back to sustainable
earnings drivers like (1) sales growth in India, (2) Nexium API supplies, (3) savings in total
annual R&D spend post hive-off of NDDR division to Daichi and (4) sustainable sales growth,
higher than 15% in geographies of CIS, Africa and Latin America.
We are building a successful monetization of the Lipitor opportunity for Ranbaxy. However,
given the rich valuations and the lack of distinction on the Street’s part between recurring
and non-recurring opportunities, the stock remains vulnerable to any negative news flow on
Lipitor. Key exclusivity opportunities like Lipitor and Aricept have been filed from the facilities
under the regulatory scanner. The roadmap for monetizing these opportunities remains
uncertain pending final settlement with the regulators on the issue. We don’t share the
Street as well as management optimism on a quick resolution and believe that there is a
binary risk to successful monetization of these FTF opportunities. We maintain SELL with a
target price of Rs365.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ranbaxy Laboratories (RBXY)
Pharmaceuticals
Is Lipitor tainted? Through a complaint filed in a district court in Washington, Mylan
has filed a suit against the US Food and Drug Administration to block Ranbaxy
Laboratories’ exclusive rights to sell a generic version of Pfizer’s cholesterol pill Lipitor.
Significantly, Mylan has asked the court to compel the FDA to state publicly whether
Ranbaxy’s application ’is tainted by Ranbaxy’s misconduct’ and that therefore the
application must be denied and the 180-day reward voided. Excluding FTF, Ranbaxy’s
pipeline value is trading at 21X 2011E base business EPS. Maintain SELL with a target
prcie of Rs365
Recap – Lipitor case history
ƒ US FDA has invoked the ‘Application Integrity Policy’ on Ranbaxy, temporarily banning
products from its Paonta Sahib facility and withholding all ANDA approvals in 2009
ƒ Despite the FDA censure, Ranbaxy has been able to salvage value from its FTF pipeline –
Valtrex and Aricept generics were launched as a consequence of site switch and Flomax
generic opportunity was settled
ƒ Ranbaxy reached an agreement with Pfizer in 2008 to sell copies of the world’s bestselling medicine beginning November 2011
ƒ Ranbaxy claims it is entitled to 180 days of marketing exclusivity as a reward for being the
first to challenge the Lipitor patents. It has not yet received final regulatory approval on its
application to sell the copy
ƒ Under normal circumstances, no other generic filer can launch the product until Ranbaxy
triggers this exclusivity or FDA blocks the exclusivity of Ranbaxy except authorized generic.
Therefore, Mylan’s legal challenge, in our view, implies the possibility of a Mylan launch
despite the outcome on the status of Ranbaxy’s launch. Mylan and Teva were originally
expected to launch it after the exclusivity period.
Lipitor outcome - a key short-term catalyst
Successful monetization of Lipitor is one of the most awaited catalysts by the Street. Besides being
a significant opportunity - US$561mn contribution to sales and US$337 mn contribution to profits
- it will establish the direction/status of the FDA/DOJ issue. The acceptance of Mylan’s claim, in our
view, would highlight that all is not well with Lipitor given the filing site is not clear and would
induce additional competition for the drug once it comes off-patent even if Ranbaxy is able to sell
the drug (our base case). Higher competition could lower Ranbaxy’s market share and reduce
profitability from the specific opportunity. Lipitor currently constitutes (~10%) of our target price
and assuming a lower market share of 25% and a pricing erosion of 60% as opposed to 50%, the
target price would be negatively impacted by Rs20.
Focus likely to shift to base business
Although in the short term the stock is likely to be held hostage to news flow on Lipitor, in
the longer term we believe that the investor focus ought to shift back to sustainable
earnings drivers like (1) sales growth in India, (2) Nexium API supplies, (3) savings in total
annual R&D spend post hive-off of NDDR division to Daichi and (4) sustainable sales growth,
higher than 15% in geographies of CIS, Africa and Latin America.
We are building a successful monetization of the Lipitor opportunity for Ranbaxy. However,
given the rich valuations and the lack of distinction on the Street’s part between recurring
and non-recurring opportunities, the stock remains vulnerable to any negative news flow on
Lipitor. Key exclusivity opportunities like Lipitor and Aricept have been filed from the facilities
under the regulatory scanner. The roadmap for monetizing these opportunities remains
uncertain pending final settlement with the regulators on the issue. We don’t share the
Street as well as management optimism on a quick resolution and believe that there is a
binary risk to successful monetization of these FTF opportunities. We maintain SELL with a
target price of Rs365.
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