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Ranbaxy's FTF pipeline looks strong but could disappoint due to US FDA issues and increased
competition. The core business and margins remain weak, in our view, due to operating leverage
issues. We cut our TP by 21% to Rs365 and maintain our Sell rating on weak margins, US FDA
troubles and a rich valuation.
Strong near-term Para IV pipeline but chances of disappointment are also high
We acknowledge that Ranbaxy has a good near-term Para IV pipeline – generic (g) Aricept
(ongoing), gLipitor (CY11-12F) and gActos, gDiovan (CY12). However, the company has had
mixed fortunes in monetising its Para IV pipeline in the past due to US FDA issues – while it was
successful in monetising gValtrex and gAricept opportunities, it missed out on gImitrex and could
only partly monetise gFlomax. Besides the risk of delayed or non-receipt of US FDA approval for
its key products, upside is being capped as innovator companies settle with more companies (eg,
gNexium) or bring in authorised generics (eg gAricept and gLipitor).
Headwinds in most markets; operating margin remains the lowest among peers
We expect the company’s US business (32% of CY10 revenues) and domestic formulation (18%)
to do well in CY11 due to a low base effect and Project Viraat implementation respectively.
However, Europe (15%) continues to face muted growth and margin pressure and other
emerging markets (26%) have been quite volatile in recent quarters. The company continues to
bear the brunt of operating leverage and US FDA issues, reporting single-digit core EBITDA
margins on our calculations for most of the last eight quarters.
Earnings and TP downgrades: Sell on weak margins, US FDA and rich valuations
We lower our core EBITDA margin assumption resulting in a 11-12% cut to our core CY11 and
CY12 earnings estimates and a 21% cut in our TP to Rs365. We now value the core business at
Rs322/sh on a 2011F EV/EBITDA of 15.1x (a 10% discount to the sector due to lowest operating
margin among peers and US FDA troubles) and then add one-offs of Para IV at Rs43/share
based on our DCF analysis (post a 30% execution risk discount). We maintain our Sell rating on
weak operating margin, persistent US FDA troubles and rich valuations.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ranbaxy's FTF pipeline looks strong but could disappoint due to US FDA issues and increased
competition. The core business and margins remain weak, in our view, due to operating leverage
issues. We cut our TP by 21% to Rs365 and maintain our Sell rating on weak margins, US FDA
troubles and a rich valuation.
Strong near-term Para IV pipeline but chances of disappointment are also high
We acknowledge that Ranbaxy has a good near-term Para IV pipeline – generic (g) Aricept
(ongoing), gLipitor (CY11-12F) and gActos, gDiovan (CY12). However, the company has had
mixed fortunes in monetising its Para IV pipeline in the past due to US FDA issues – while it was
successful in monetising gValtrex and gAricept opportunities, it missed out on gImitrex and could
only partly monetise gFlomax. Besides the risk of delayed or non-receipt of US FDA approval for
its key products, upside is being capped as innovator companies settle with more companies (eg,
gNexium) or bring in authorised generics (eg gAricept and gLipitor).
Headwinds in most markets; operating margin remains the lowest among peers
We expect the company’s US business (32% of CY10 revenues) and domestic formulation (18%)
to do well in CY11 due to a low base effect and Project Viraat implementation respectively.
However, Europe (15%) continues to face muted growth and margin pressure and other
emerging markets (26%) have been quite volatile in recent quarters. The company continues to
bear the brunt of operating leverage and US FDA issues, reporting single-digit core EBITDA
margins on our calculations for most of the last eight quarters.
Earnings and TP downgrades: Sell on weak margins, US FDA and rich valuations
We lower our core EBITDA margin assumption resulting in a 11-12% cut to our core CY11 and
CY12 earnings estimates and a 21% cut in our TP to Rs365. We now value the core business at
Rs322/sh on a 2011F EV/EBITDA of 15.1x (a 10% discount to the sector due to lowest operating
margin among peers and US FDA troubles) and then add one-offs of Para IV at Rs43/share
based on our DCF analysis (post a 30% execution risk discount). We maintain our Sell rating on
weak operating margin, persistent US FDA troubles and rich valuations.
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