Ranbaxy Laboratories: Worst is over, Best is capped: BofA ML

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Ranbaxy Laboratories Limited — Worst is over, Best is capped

Reinstate coverage with Neutral; limited upside
We reinstate coverage of Ranbaxy with a Neutral rating and PO of Rs625. Over
CY10-12E, we expect business recovery to sustain with 18% sales CAGR driven
by increased focus on domestic market, and a stronger 35% reported profit
CAGR from cost containment and operating leverage. However, valuations
already appear to factor favourable resolution to US FDA issue, and leave limited
potential upside.


Sales recovery underway
Following flat CY09 sales, base business has reverted to 10% growth last
quarter. We forecast 18% sales CAGR over CY10-12E with double-digit growth in
key segments, namely (1) domestic formulations, driven by product and
marketing initiatives, (2) US generics, from additional capacities (Ohm Labs,
Mohali), likely clearance of Dewas/Poanta facilities, and (3) RoW markets,
through increased filings, ramp up of SA facility and in-licensed products from
Daiichi Sankyo.

Forecasts assume full monetization of exclusivities
Ranbaxy has arguably the richest FTF pipeline amongst Indian players with
innovator sales estimated at US$24bn. Given recent track record of protecting
exclusivities, we similarly expect timely monetization of all known exclusivities
e.g. Lipitor, Aricept, Actos, Nexium, through (1) settlement with innovator, (2)
successful site transfers, and (3) passing off exclusivity rights for lump sum fee.

Limited room for disappointment
Although favourable resolution of USFDA issue will be positive trigger for the
stock, this possibility has been factored in our forecasts. In fact, likely delays will
impact our PO by ~18% to Rs 510, reflecting (1) lower base sales from impacted
facilities, and (2) risk adjusted monetization (50% probability) to exclusivities.