Ranbaxy Laboratories - Revival On Track; Result Update Q2FY15 :: Edelweiss

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For Ranbaxy Laboratories (RBXY) the first half of Diovan exclusivity has progressed well despite Novartis’ aggressive strategies. Better-than-expected Diovan sales and profitability drove RBXY’s big earnings beat for Q2FY15. RBXY’s underlying business continues charting the revival trajectory as it readies for the merger with Sun Pharma (SUNP). RBXY also confirmed that base margin has inched up to ~10% (similar to Jun’14 quarter). Possibility of niche launches in the US and emerging markets in the next 6 months and API plants coming on-stream enhances confidence about RBXY’s revival. We believe Street is under-appreciating SUNP-RBXY synergies post merger and that RBXYs turnaround will be faster than Street’s anticipation.

Key takeaways from Q2FY15 earnings call

a) RBXY hopes to launch some “differentiated/limited competition” products in the US and emerging markets in the next 6 months; b) RBXY believes it continues to hold exclusivities for Nexium and Valcyte and will launch on approval; c) Both Dewas and Toansa plants started to supply for emerging market geographies; d)Synriam was launched in some African countries during the quarter; e) Domestic OTC business will show improved traction as excess inventory tapers towards end-CY14; f) India growth is robust with second successive quarter of above-industry growth.

Base margin improving as expected

Based on RBXY’s guidance of base business margin of 10% for the quarter, we estimate Diovan sales during Q2FY15 were in the USD120-130mn range (sales estimate: USD70-80mn) with high EBITDA margin (~85%). Given the tie-up with a third party for API supplies, our EBITDA margin estimate of 60-70% was also lower. Staff cost remained stable YoY while overheads declined 21%, driving base business margin. With efforts towards cost containment, more launches in the US and revival in emerging markets and India, we believe RBXY’s EBITDA margin will continue to improve.

Link

https://www.edelweiss.in/research/Ranbaxy-Laboratories--Revival-On-Track;-Result-Update-Q2FY15/27373.html