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.