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Ranbaxy--------------------------------------------------------------------- Maintain UNDERPERFORM
Down 12% in a week, a steal now? Not yet
● Ranbaxy was down 12% last week, but it is still expensive as it
factors in the best case outcome. The CMP assumes timely
launch of Lipitor (Nov 2011) and ramp-up of base business margin
from 6% in CY10 to 13-14% in CY12. Therefore, upside is limited.
● There could be downside risk of Rs 60/share if the Lipitor launch
is delayed. Watson would launch generic Lipitor in Nov 2011,
irrespective of whether Ranbaxy launches or not. Thus, if
Ranbaxy’s launch is delayed, it impacts Ranbaxy’s market share
of Lipitor and pick up in the US base business sales.
● Additionally, Ranbaxy’s comprehensive settlement with FDA/DOJ
may involve a financial penalty if some of charges of falsification
of data are proven.
● On the base business, we see limited possibility of margins
exceeding 14% in CY12 (Figure 1) especially after the lackluster
guidance in CY11. Our TP of Rs 450 values base business at 18x
CY12 or Rs 330/sh (Figure 3) and FTF pipeline at Rs 120/sh.
Recommend switch to Lupin, our pharma space top pick.
CMP already factors in the best case scenario
Ranbaxy’s stock is down 12% post its Dec 2010 results. However, we
believe the current price still factors in the best case scenario for
Ranbaxy and therefore limits upside. The current price assumes 1)
successful launch of Lipitor on 30 Nov 2011 and 2) base business
margins ramping from 6-7% in CY10 to 13-14% in CY12 (Figure 1).
Our target price of Rs 450/share assigns Rs 330/share to the base
business (Figure 3) and Rs 120/share to the FTF pipeline.
Lipitor launch in Nov 2011 is imperative, else upside is
materially reduced
Watson would launch its generic version of Lipitor in Nov 2011,
irrespective of the Ranbaxy launch. Therefore, if Ranbaxy’s launch is
delayed, Lipitor’s upside would be materially reduced. We value Lipitor
at Rs 60/share for Ranbaxy, but additionally, a timely Lipitor launch is
crucial for the base business sales pick up in the US. Till now, we do
not have clarity whether Lipitor can be launched in time or not, but the
current market price does factor in a timely launch of Lipitor.
Could CY12 sales guidance exceed $2.1bn?
Upside to our base business valuation of Rs 330/share (Fig 3) could
come from two sources 1) if Ranbaxy could contain fixed-cost
increase to less than 5% (Fig 1), which seems difficult or 2) base
business sales for CY12 is more than US$2.1 bn.
We see limited possibility of more than US$2.1bn sales in CY12
especially after the lacklustre sales guidance in CY11. In Figure 2, our
sales for North America are lower than CY10 as Valtrex sales were
significant in 2HCY10, which we expect to moderate in CY11 as
generic competition increases.
FDA/DOJ related penalty is an additional overhang
Ranbaxy’s comprehensive settlement with the FDA/Department of
Justice may involve a financial penalty if some charges of falsification
of data are proven. In our current valuation, we have not considered
any penalty but, if any charges are imposed, our estimates have a
downside.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Ranbaxy--------------------------------------------------------------------- Maintain UNDERPERFORM
Down 12% in a week, a steal now? Not yet
● Ranbaxy was down 12% last week, but it is still expensive as it
factors in the best case outcome. The CMP assumes timely
launch of Lipitor (Nov 2011) and ramp-up of base business margin
from 6% in CY10 to 13-14% in CY12. Therefore, upside is limited.
● There could be downside risk of Rs 60/share if the Lipitor launch
is delayed. Watson would launch generic Lipitor in Nov 2011,
irrespective of whether Ranbaxy launches or not. Thus, if
Ranbaxy’s launch is delayed, it impacts Ranbaxy’s market share
of Lipitor and pick up in the US base business sales.
● Additionally, Ranbaxy’s comprehensive settlement with FDA/DOJ
may involve a financial penalty if some of charges of falsification
of data are proven.
● On the base business, we see limited possibility of margins
exceeding 14% in CY12 (Figure 1) especially after the lackluster
guidance in CY11. Our TP of Rs 450 values base business at 18x
CY12 or Rs 330/sh (Figure 3) and FTF pipeline at Rs 120/sh.
Recommend switch to Lupin, our pharma space top pick.
CMP already factors in the best case scenario
Ranbaxy’s stock is down 12% post its Dec 2010 results. However, we
believe the current price still factors in the best case scenario for
Ranbaxy and therefore limits upside. The current price assumes 1)
successful launch of Lipitor on 30 Nov 2011 and 2) base business
margins ramping from 6-7% in CY10 to 13-14% in CY12 (Figure 1).
Our target price of Rs 450/share assigns Rs 330/share to the base
business (Figure 3) and Rs 120/share to the FTF pipeline.
Lipitor launch in Nov 2011 is imperative, else upside is
materially reduced
Watson would launch its generic version of Lipitor in Nov 2011,
irrespective of the Ranbaxy launch. Therefore, if Ranbaxy’s launch is
delayed, Lipitor’s upside would be materially reduced. We value Lipitor
at Rs 60/share for Ranbaxy, but additionally, a timely Lipitor launch is
crucial for the base business sales pick up in the US. Till now, we do
not have clarity whether Lipitor can be launched in time or not, but the
current market price does factor in a timely launch of Lipitor.
Could CY12 sales guidance exceed $2.1bn?
Upside to our base business valuation of Rs 330/share (Fig 3) could
come from two sources 1) if Ranbaxy could contain fixed-cost
increase to less than 5% (Fig 1), which seems difficult or 2) base
business sales for CY12 is more than US$2.1 bn.
We see limited possibility of more than US$2.1bn sales in CY12
especially after the lacklustre sales guidance in CY11. In Figure 2, our
sales for North America are lower than CY10 as Valtrex sales were
significant in 2HCY10, which we expect to moderate in CY11 as
generic competition increases.
FDA/DOJ related penalty is an additional overhang
Ranbaxy’s comprehensive settlement with the FDA/Department of
Justice may involve a financial penalty if some charges of falsification
of data are proven. In our current valuation, we have not considered
any penalty but, if any charges are imposed, our estimates have a
downside.
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