Ranbaxy Laboratories -Subdued Quarter- nearing settlement ::Macquarie Research,

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Ranbaxy Laboratories
Subdued Quarter- nearing settlement
Event
 Ranbaxy reported 2Q CY11 sales of Rs20.5bn (in line with our estimates) and
adjusted PAT of Rs1.5bn (lower than estimate). Lower margin (~ 9% EBITDA
margin) on account of product mix (lower US (Aricept) sales and higher tender
sales in Africa) drove the miss. Maintain OP with TP of Rs545.
 RBXY indicated the negotiations are progressing well on the demand they
received from DoJ. RBXY has given a settlement offer towards resolution of
all outstanding matters. This offer is conditional on negotiations and
administrative actions by the US FDA. We believe such a settlement, even
with a likely penalty payment (our base case estimate is US$250m), would be
a favourable outcome. Inability to resolve FDA and DoJ related issues, or an
exorbitantly high penalty payment remain the key risks to our OP rating.
Impact
 Lower Aricept sales – the key miss: US sales were lower at US$95m
(Macq est. US$108m) on account of lower Aricept sales (180 day exclusivity
ended in 2Q CY11). We estimate US sales ex-Aricept for 2Q CY11 at
US$75m. RBXY’s confidence on monetizing Lipitor FTF opportunity and being
a major player in Lipitor post 180-day exclusivity as well was encouraging.
 Emerging markets (EM) focus: EM recorded sales of US$261m (up 14%
YoY) and contributed ~57% to sales. India grew by 11% YoY (secondary
sales growth at 18% vs.14% Industry growth), with project Viraat starting to
bear fruits. Africa sales grew by 30%, largely aided by the ARV tender sales.
Developed market contributed ~ 34% to the top-line & API contributed ~ 9%.
 RBXY guiding improvement in the base business margin starting CY12:
Management indicated that significant improvement in the margin would come
from 1Q CY12 (1Q CY11 EBITDA margin ~ 9%). We anticipate an expansion
in margin given the likely operating leverage in EM markets, commencement
of supply of Nexium DF (2H CY11) and better manufacturing asset utilization
post FDA issue resolution (likely 2H CY11), as we believe the current cost
structures are not reflective of underlying potential margin.
Earnings and target price revision
 We slightly adjust our core earnings estimate for CY11/12/13 to Rs15/23.5/27
from Rs16/24/27. Maintain Outperform rating and target price of Rs545.
Price catalyst
 12-month price target: Rs545.00 based on a Sum of Parts methodology.
 Catalyst: Comprehensive settlement with FDA and DoJ
Action and recommendation
 We maintain our OP rating on the name but do acknowledge that FDA issue
resolution remains the biggest driver of the stock (our estimate 2H CY11).
After adjusting for the FTF exclusivity, RBXY trades at ~19x CY12E earnings.
Given the recent rally, we recommend adding on any major weakness.


Conference Call Takeaways/ Other Highlights
 India : Sales grew 11% YoY to Rs4.8bn. Sales in the Consumer Healthcare business stood at
Rs759m. The slow growth (11% YoY) is partly on account of single digit growth of Anti-invectives
(RBXY strong player in Anti-invectives). Project Viraat has gained ground with secondary growth
rate 18% as compared to 15% for the Indian Pharma market (IMS YTD June 2011). Market share
of the Company also improved to 4.79% (IMS SSA Audit YTD June 2011), when compared with
4.63% (IMS SSA Audit YTD June 2010).
 US business:  Sales in US was ~US$95m with base business contributing ~US$70m. During the
Quarter, exclusivity on Aricept, launched in 4Q10 came to an end. RBXY said that the negotiations
with USFDA and the DoJ are progressing well and the management stands very positive on
monetizing Lipitor. RBXY has filed an ANDA with the USFDA seeking approval to market
Oxycodone Hydrochloride Extended-Release tablets in the 30, 40, 60 and 80 mg strengths.
 Europe: RBXY recorded sales of US$79m, a growth of 15% YoY. Romania, with sales of
US$30m was the key driver. RBXY launched Olanzapine Tablets, the generic version of Zyprexa,
on Day-1 in Spain.
 Asia Pacific: RBXY recorded sales of US$23m, a growth of 24% YoY, on account of higher sales
in most of the markets.
 CIS: RBXY registered sales of US$21m, a growth of 5% YoY. While the Russia business was
strong, Ukraine business remained a drag.
 Africa: RBXY recorded sales of US$51m, a growth of 33% YoY, helped by Tender sales
contribution.
 LATAM: RBXY recorded sales of US$17m (down 11% YoY) in 2QCY11 on account product
portfolio rationalisation (certain products were discontinued).
 API business recorded sales of US$40m as compared to previous year aided by sales of
Esomeprazole API to AstraZeneca.
 Margin Improvement in the base business to come from CY12: Management indicated that
significant improvement in the margin would come from 1Q CY12.
 Management guided for a FY12 Tax rate of 18-20%.
 Management guided for a significant higher base business EBITDA margin expansion from 1Q
CY12.
 Current Derivative position stands at ~US$756m; Gross debt: US$630m; Cash and cash
equivalents: US$380m; Net Debt: US$250m.
 Synergy projects with Daiichi Sankyo during the quarter included exploratory work on multiple
front-end, manufacturing and cost reduction projects.