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Ranbaxy (RANB.BO)
Strong Numbers, Aricept Led
Beats estimates — Ranbaxy’s 1QCY11 operating PAT (at Rs3.2bn) beat our estimate
by c58% - we believe, primarily on the back of higher than expected exclusivity sales of
generic Aricept. We estimate core biz EBIDTA margins were at c9% during the quarter
& expect this to continue scaling up going forward, as growth picks up. The
management had no further update on the FDA/DoJ issues resolution process. We
maintain our high risk, high return Buy (1M) rating.
Steady revenue growth, excluding exclusivities — Ranbaxy indicated that it saw
double-digit sales growth during the quarter, excluding exclusivities (Valtrex in
1QCY10, Aricept in 1QCY11). Growth was steady in India (+9%; stronger growth in
primary sales), Europe (+10%; Romania & France led) & Consumer (+35%) while it
remained subdued in Asia Pac (-1%) & RoW markets (+3%). Base biz sales in USA
remained in the cUS$70-75m range. We estimate Aricept sales of cUS$80-85m, which
is a strong pickup over 4QCY10 levels.
Margins stable; still room for improvement — EBIDTA margins declined 1,950 bps
YoY to c18.5%, primarily on the back of lower exclusivity sales in 1QCY11. We
estimate that core biz (excl exclusivity revenues) EBIDTA margin was at c9% during
the quarter – this is likely to pick up over the course of the next few quarters as sales
continue to grow, especially in India and other emerging markets. Effective tax rate has
come down and is expected to remain in the c20-25% range for the full year.
Earnings call takeaways — a) FDA/DoJ resolution: no update on this issue –
management refused to comment on speculation related to potential penalties; b)
Nexium supplies to Astra: API supplies on, formulations supply to start by end 2H; c)
India biz: Project Viraat has started paying off, Ranbaxy has seen strongest growth in
primary sales, among large Indian companies in Jan, Feb & March 2011 – likely to
reflect in company level sales over the next few months; d) Has adequately provisioned
for the wage increases negotiated in the earlier part of the year
Ranbaxy
Company description
Ranbaxy is a leading Indian pharmaceutical company with a strong export business
complementing its domestic business. It has a vision of becoming a leading
generics pharmaceutical company in the global market and, in the long term, a
research-led pharmaceutical company. The company already has a presence in
several countries, and has developed a complex business model, perhaps the first
of its kind in a developing country.
Investment strategy
We rate Ranbaxy Buy/Medium Risk with a target price of Rs700. The timely
approval & launch of Valtrex (generic valacyclovir) and Aricept (generic donepezil)
in the US market with exclusivity and trends in the last two quarters indicate that the
worst is behind for Ranbaxy. There has been tangible improvement in emerging
markets, which were severe pressure at the beginning of the year and signs that
Daiichi sees a key role for Ranbaxy in its future strategy. The impact of the US FDA
action on its facilities (Dewas & Paonta Sahib) is also well understood and built into
estimates and valuations. With the approval for Valtrex and Aricept coming through
on time, we also have more comfort on Ranbaxy’s ability to successfully change
sites and get approvals in time for its other FTF opportunities, reinforcing our
positive stance on the stock.
Valuation
We have a target price of Rs700 for Ranbaxy, comprising Rs550 for the base
generics business and Rs150 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 Jun 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 probabilityadjusted 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.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ranbaxy (RANB.BO)
Strong Numbers, Aricept Led
Beats estimates — Ranbaxy’s 1QCY11 operating PAT (at Rs3.2bn) beat our estimate
by c58% - we believe, primarily on the back of higher than expected exclusivity sales of
generic Aricept. We estimate core biz EBIDTA margins were at c9% during the quarter
& expect this to continue scaling up going forward, as growth picks up. The
management had no further update on the FDA/DoJ issues resolution process. We
maintain our high risk, high return Buy (1M) rating.
Steady revenue growth, excluding exclusivities — Ranbaxy indicated that it saw
double-digit sales growth during the quarter, excluding exclusivities (Valtrex in
1QCY10, Aricept in 1QCY11). Growth was steady in India (+9%; stronger growth in
primary sales), Europe (+10%; Romania & France led) & Consumer (+35%) while it
remained subdued in Asia Pac (-1%) & RoW markets (+3%). Base biz sales in USA
remained in the cUS$70-75m range. We estimate Aricept sales of cUS$80-85m, which
is a strong pickup over 4QCY10 levels.
Margins stable; still room for improvement — EBIDTA margins declined 1,950 bps
YoY to c18.5%, primarily on the back of lower exclusivity sales in 1QCY11. We
estimate that core biz (excl exclusivity revenues) EBIDTA margin was at c9% during
the quarter – this is likely to pick up over the course of the next few quarters as sales
continue to grow, especially in India and other emerging markets. Effective tax rate has
come down and is expected to remain in the c20-25% range for the full year.
Earnings call takeaways — a) FDA/DoJ resolution: no update on this issue –
management refused to comment on speculation related to potential penalties; b)
Nexium supplies to Astra: API supplies on, formulations supply to start by end 2H; c)
India biz: Project Viraat has started paying off, Ranbaxy has seen strongest growth in
primary sales, among large Indian companies in Jan, Feb & March 2011 – likely to
reflect in company level sales over the next few months; d) Has adequately provisioned
for the wage increases negotiated in the earlier part of the year
Ranbaxy
Company description
Ranbaxy is a leading Indian pharmaceutical company with a strong export business
complementing its domestic business. It has a vision of becoming a leading
generics pharmaceutical company in the global market and, in the long term, a
research-led pharmaceutical company. The company already has a presence in
several countries, and has developed a complex business model, perhaps the first
of its kind in a developing country.
Investment strategy
We rate Ranbaxy Buy/Medium Risk with a target price of Rs700. The timely
approval & launch of Valtrex (generic valacyclovir) and Aricept (generic donepezil)
in the US market with exclusivity and trends in the last two quarters indicate that the
worst is behind for Ranbaxy. There has been tangible improvement in emerging
markets, which were severe pressure at the beginning of the year and signs that
Daiichi sees a key role for Ranbaxy in its future strategy. The impact of the US FDA
action on its facilities (Dewas & Paonta Sahib) is also well understood and built into
estimates and valuations. With the approval for Valtrex and Aricept coming through
on time, we also have more comfort on Ranbaxy’s ability to successfully change
sites and get approvals in time for its other FTF opportunities, reinforcing our
positive stance on the stock.
Valuation
We have a target price of Rs700 for Ranbaxy, comprising Rs550 for the base
generics business and Rs150 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 Jun 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 probabilityadjusted 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.
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