Ranbaxy Laboratories - Recovery in sight; Priced in; visit note; Reduce :: Edelweiss PDF link

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Ranbaxy Laboratories (RBXY IN, INR 497, Reduce)

Our interaction with the Ranbaxy (RBXY) management indicates that company is working towards improving productivity across businesses with key focus on monetizing critical products in US. Site transfers to Mohali, early resumption of Dewas and incremental approvals (including two FTFs and Isotretinoin) will add upsides to the US business. RBXY expects to achieve industry level margins (18-20%) by CY16-17 with complete resolution of FDA issues. We have, thus, build in back-ended expansion in margins and see that recovery is build in current valuations.

Mohali/Dewas to boost US sales

RBXY aims to gain higher market share in Lipitor post exclusivity through higher cost efficiency by decongesting Ohm’s facility and site transfer to Mohali, which would result in higher yield. Further, it will use the Ohm facility to file products in niche segments such as controlled substances. RBXY also indicated early resolution of Dewas facility (we expect by end CY12) and potential supplies of Cephalosporin and Penems.

Confident of launching two FTFs in CY12

Management is confident of monetizing two FTF opportunities in CY12. Actos and Diovan could be the potential launches with market size of USD2.5bn each. We have not build in Diovan in our estimates due to non clarity. Its launch could add USD150-200mn sales during exclusivity (NPV value of INR10/share).

Cipher expects Isotretinoin launch by end CY12

Cipher, RBXY’s developing partner, has indicated launch of Isotretinoin in the US by end CY12 (FDA PDUFA date is May 2012). RBXY will be marketing this product through its derma field force and we have build USD20mn revenue in CY12 moving to USD35-40mn by CY14. RBXY will pay a mid-teen kind of royalty on sales to Cipher.

Outlook and valuations: Upside capped; maintain ‘REDUCE’

While the roadmap to address FDA issues is now clearer, the complete resolution could take 3-5 years. We have build in 14% growth in base business and 350bps margin expansion over CY12-14E. We believe that valuations are still ahead of fundamentals and maintain ‘REDUCE’ rating on the stock.

Ranbaxy Laboratories - Recovery in sight; Priced in; visit note; Reduce

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