Launches Absorica (Isotretinoin) in the U.S: Ranbaxy’s launch of Absorica
(Isotretinoin) in the US is a key event as we believe that the product will become
the largest selling product for the company in the US latest by 2014 (excl. FTF
products). The company has licensed this product from Cipher, a Canadian
company. Absorica is indicated for the treatment of severe recalcitrant nodular
acne in patients who are 12 years of age and older.
Absorica is a beginning in the quest to regain loss of revenue in US due to
USFDA issues: Apart from FTF launches, Absorica is a major product launch since
the company’s US business was impacted by USFDA ‘Import Alert’ in 2008.
Before the USFDA issues cropped up at Ranbaxy, Isotretinoin was the largest
selling product for the company, with annual revenue of ~US$100m in 2007.
However, the company had to discontinue the product due to import alert on
Dewas and Paonta Sahib facilities in 2008. Apart from being the largest selling
product, it was one of the most profitable one for the company due to limited
competition and branded nature of the product
Even after four years, the opportunity remains attractive: Despite Ranbaxy
being out of this product market for the last four years, Isotretinoin remains a
lucrative market with limited competition due to complexities involved in the
development and manufacturing of the product. Currently, there are only three
generic companies selling Isotretinoin in US viz. Teva, Mylan and Douglas
Pharma, with Teva holding majority market share. The total market size of the
product is ~US$400m. Now with the entry of Ranbaxy, it becomes a four-player
market.
Expect revenue of US$125m from Absorica in CY15, margin improvement: We
expect Ranbaxy to get revenue of US$60m, US$90m and US$125m from this
product in CY13, CY14 and CY15, respectively. We are assuming a peak market
share of 50% for Ranbaxy in CY15. Here we are assuming no significant change
in the market size of Isotretinoin. We feel that garnering US$125m revenue
won’t be a tough task, given limited competition, Ranbaxy’s previous experience
of marketing Isotretinoin and a superior product profile of Absorica compared to
other Isotretinoin products on the market. Ranbaxy has sales-force of ~ 60 reps
in dermatology segment in the US which currently promotes the derma brands
acquired from BMS. Now with the launch of Absorica, the field force can be
utilized to its potential, thereby, improving the margins of the base US business.
As the product development partner, Cipher is entitled for US$24m in milestone
income from Ranbaxy, out of which, Ranbaxy has already paid ~US$10m.
Further, Ranbaxy will pay mid-teen royalty to Cipher based on revenue
generated by the product. We expect EBITDA margins of ~25% for Ranbaxy on
this product when it achieves peak sales.
US will be a key growth driver for the company over next three years: US will
be a key growth driver for the company over next three years as the company
has a strong product pipeline of FTF and niche products to be launched in US
over next three years. We expect incremental contribution from Dewas and
Paonta Sahib plants starting CY14. Further, shifting of products from US facilities
to Mohali and incremental revenues in the US will ensure the benefit of
operating leverage for the company. We expect margin improvement for
Ranbaxy to primarily come from US business as the company has a very high
fixed cost base in US. As indicated in the graph above, we expect the base
business revenue from US business to more than double over the next three
years. Further, we expect revenue of more than US$1bn from FTF opportunities
over CY13/14.
Valuation and View: Resolution of USFDA issues remains a key for the company
to improve its revenues in US and overall profitability. However, large hedges on
the books and uncertainty related to monetization of FTF pipeline are likely to
remain an overhang on the stock in the medium term. Though the company is
showing improvement in core margins, the improvement should be sustainable
to regain investor confidence. At the current price, the stock trades at 26.5x
CY12 and 22.8x CY13 (adjusted for DCF value of FTF at Rs77/share). We maintain
‘Accumulate’, with target price of Rs579.
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