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Ranbaxy: ‘Settling’ down?
Jan 6, 2006

In what could be termed as its first out-of-the-court settlement, Ranbaxy recently entered into an agreement with the US-based Cephalon related to the launch of the latter’s sleep disorder drug ‘Provigil’ (generic name Modafinil). In this article, we shall take a look at the terms of the agreement and its impact on Ranbaxy.

About Cephalon
Cephalon, Inc., is a US-based biopharmaceutical company, engaging in the discovery, development, and marketing of products to treat sleep disorders, neurological disorders, cancer, and pain. The company generated revenues to the tune of US$ 1 bn in 2004. It markets three proprietary products, including Provigil (Modafinil) for treating of excessive sleepiness associated with shift work sleep disorder, Actiq for treating pain in cancer patients and Gabitril, which is used as an adjunct therapy for treatment of partial seizures associated with epilepsy. The company sells its products primarily in North America and Europe.

The scene before the settlement
Modafinil generated revenues to the tune of US$ 440 m in 2004, contributing around 40% to Cephalon’s turnover. Four companies i.e., Teva, Ranbaxy, Mylan and Barr had applied for a Para IV certification on the drug at the same time. This means that had the 180-exclusivity period on the drug been granted, the same would have to be shared by the four companies, thereby reducing the scope of higher realisations. At the same time, these companies were looking to launch the drug in 2006 ‘at risk’, which means that had a court found the Modafinil patent to be valid, the damages extracted by Cephalon would have to be shared by the four companies as well.

However, the equation changed when Teva became the first company amongst these four to enter into an agreement with Cephalon. This meant that while the realisations to that extent would be more attractive (for Ranbaxy, Mylan and Barr) now that Teva was out of the picture, the risk was also greater (in the event of a loss, damages would be higher as now it would have to be shared between three companies and not four).

Impact of the settlement
However recently, Ranbaxy also entered into an out-of-the-court settlement with Cephalon. The terms of the agreement are as follows:
  1. Cephalon will grant Ranbaxy a non-exclusive royalty-bearing right to market and sell a generic version of ‘Provigil’ in the US. Ranbaxy’s license will become effective in October 2011. However, in the event of a pediatric extension for ‘Provigil’, the entry would be delayed by six months (to April 2012). This is still 3 years before the scheduled patent expiry of the drug in 2014.

  2. Ranbaxy can make an earlier entry if a generic version of the drug enters the market before 2011.

  3. Also, Ranbaxy has agreed to grant Cephalon a non-exclusive license, effective immediately, to certain of its worldwide intellectual property rights (IPRs) related to Modafinil in exchange for which it will receive milestone payments. However, since Ranbaxy has not specified the exact amount of these milestone payments, it would be difficult to guage the financial implication of the same.

  4. Cephalon has also agreed to enter into certain arrangements with Ranbaxy related to the latter’s supply of the active pharmaceutical ingredient (API) Modafinil.

  5. However, it must be noted that this deal is subject to review by the US Federal Trade Commission.

Entering into this settlement means that Ranbaxy will not launch the drug in 2006. The financial impact of this settlement is difficult to guage, as Ranbaxy has not divulged any financial details. While 2011 seems a long way off, this settlement can be perceived as a positive step taken by the company. This is because any potential upside from the launch of the drug ‘at risk’ in 2006 was limited as the benefits would have to be shared. Also the risk of shelling out damages in the case of a loss is also now mitigated. This settlement also obviates the need to spend on further litigation on the drug.

It must be noted that Para IV filings, though lucrative in the event of the win, are in recent times proving to be a hard nut to crack. Nothing highlights this fact better than Ranbaxy’s recent court losses against Pfizer with regards to the latter’s blockbuster drug ‘Lipitor’. Therefore, from a long-term perspective, this agreement seems to be a step in the right direction.

It must be noted that Ranbaxy’s guidance of 18% YoY topline growth included the sales from Modafinil. However, in our projections we had not factored in any significant upside from the same and therefore to that extent we maintain our numbers.

What to expect?
At the current price of Rs 366, Ranbaxy is trading at a price to earnings multiple of 15.3 times our estimated CY07 earnings. Going forward, the US and the European markets are likely to be the key growth drivers for the company. With its global presence and strong R&D capabilities, Ranbaxy will look to garner a substantial pie of the generic market in the next two to three years when a large number of products go off patent. While 9mCY05 has been lacklustre, we expect a pick up in growth in CY06 and CY07 led by its generics business in the US, an increased product pipeline and its wide and expanding geographical reach. However, pricing pressure in the US markets, which severely affected the company in CY05, is likely to continue in CY06 as well. We remain positive on the company’s prospects from a three-year perspective.

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