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Ranbaxy (RANB.BO)
Event: Product Update - Thursday, 25 November (After Market Close)
Generic Aricept in the US – Will Approval Come Through?
A Key Catalyst — Ranbaxy enjoys sole exclusivity in Aricept and can launch with
6m exclusivity on Nov 25, ’10, if it gets final approval – potential upside of
Rs16/sh during the exclusivity period. Approval status is however unclear, given
Ranbaxy’s manufacturing issues with the US FDA. We expect this to be a key
catalyst for the stock, with direction dependent on approval status. However, we
expect downside to be relatively limited by the fact that Ranbaxy should be able to
maintain exclusivity even if it does not get approval on time (pre MMA filing) or if it
is able to monetize the opportunity in any other way (a la Flomax).
Sole FTF on Aricept — The US FDA recently changed the status of Teva’s generic
Aricept (annual sales of cUS$2.4bn in the US) ANDA from final to tentative &
clarified that Ranbaxy is the sole FTF on this product. Ranbaxy is entitled to 180
days marketing exclusivity, post expiry of the ‘841 patent on Nov 25.
Approval Status Unclear — It is uncertain whether Ranbaxy can get its own ANDA
approved in time, given its issues with the US FDA. Its track record has been
mixed: on time in Valtrex, delayed (exclusivity retained) in Imitrex, Pravachol &
Zocor & no approval in Flomax. We believe ANDAs originally filed from Paonta
Sahib may not get approved (AIP issue) but those from Dewas should go through
with site transfers. We are not sure where the Aricept was originally filed from.
Potential Upside — Aricept has annual sales of cUS$2.4bn in the US. If Ranbaxy
launches with sole exclusivity, we believe this could add cUS$300m & cS$150m
to revenues & net income during the 6m exclusivity period (assuming 40% price
erosion, 45% market share & 50% NPM) – i.e. upside of cRs16/sh to EPS.
Could Retain Exclusivity Even on Delayed Approval — Ranbaxy appears to have
filed its ANDA in June ’03 (as per two Citizen’s Petitions filed by Apotex & Eisai),
making it a pre-MMA filing – where exclusivity is triggered by only a court verdict
or generic launch. This implies that Ranbaxy may maintain exclusivity, even if it is
unable to get approval on time (as was the case with Imitrex earlier). We believe
this along with the fact that Ranbaxy may have options to monetize the opportunity
(even if it does not get approval) should keep potential downside limited.
Valuation
We have a target price of Rs700 for Ranbaxy, comprising Rs535 for the base
generics business and Rs165 for the company's patent challenge pipeline. We
use EV/Sales to value the core business as we believe Ranbaxy's current
profitability is skewed downwards by the unabsorbed overheads at Paonta
Sahib & Dewas as well as the high legal & consultancy charges being incurred
towards resolving the FDA issues at these plants. We value the core generics
business (excluding exclusivity upsides) at 2.4x Mar 12E recurring sales, which
is at a 10% discount to the median of the band in which it has traded over the
past 8-9 years. We believe this discount is warranted given the uncertainty in
its business following issues with the US FDA. We value the company's patent
challenge pipeline using a probability-adjusted NPV approach and applying a
discount rate of 15%.
Risks
We rate Ranbaxy Medium Risk as opposed to the Low Risk rating as suggested
by our quant-based rating system, which tracks 260-day historical share price
volatility. While there are signs of recovery in the business, we believe risk is
still on the higher side due to the uncertainty related to its issues with the US
FDA / DoJ. The key downside risks to our target price include: 1) Slower than
expected resolution of the US FDA issues; 2) Setbacks on its already monetized
patent challenge pipeline, in form of litigation wins by other generic companies
or delay in approvals/launches; 3) Intensifying pricing pressure in the US and
European markets.
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