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Ranbaxy: A year to forget! - Views on News from Equitymaster
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Ranbaxy: A year to forget!
Jan 18, 2006

Performance Summary
Ranbaxy has reported subdued results for the fourth quarter and year ended December 2005. For the year, topline witnessed a fall primarily owing to intense competition and price erosion in the US generics market. However, increased contribution from the non-US businesses helped the company in arresting any severe deterioration in performance. Operating margins severely contracted due to increase in R&D expenditure and legal costs. This, along with a substantial fall in other income and a rise in interest costs, led to a 63% YoY decline in the bottomline for CY05.

Financial performance: A snapshot
(Rs m) 4QCY04 4QCY05 Change CY04 CY05 Change
Net sales 14,341 14,291 -0.3% 54,321 53,238 -2.0%
Expenditure 12,135 13,637 12.4% 44,507 49,275 10.7%
Operating profit (EBDITA) 2,206 654 -70.4% 9,814 3,963 -59.6%
EBIDTA margin (%) 15.4% 4.6%   18.1% 7.4%  
Other income 34 22 -35.3% 1,000 186 -81.4%
Interest (net) 104 195 87.5% 335 662 97.6%
Depreciation 310 447 44.2% 1,215 1,502 23.6%
Profit before tax 1,826 34 -98.1% 9,264 1,985 -78.6%
Tax 255 (377) -247.8% 1,881 (340) -118.1%
Extraordinary item - 285   (372) 285  
Minority interest 6 10 66.7% 25 19  
Profit after tax/(loss) 1,565 686 -56.2% 6,986 2,591 -62.9%
Net profit margin (%) 10.9% 4.8%   12.9% 4.9%  
No. of shares (m) 185.7 371.8   185.7 371.8  
Diluted earnings per share (Rs)*         7.0  
Price to earnings ratio (x)*         54.4  
(* trailing 12 months)            

What is the company’s business?
Ranbaxy is the largest pharmaceutical company in India and manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). It invests 6% of revenues in R&D. Ranbaxy's continued focus on the US and European markets has helped it build deep product pipelines. The company has about 170 ANDA filings out of which 111 have been approved by the USFDA and 59 are awaiting approval. The company sells products in over 70 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 44 countries and manufacturing operations in 7 countries.

What has driven performance in CY05?
Brutal US scenario: It was an extremely tough year for Ranbaxy’s vital US generics business, where revenues fell by a significant 22% YoY, accounting for about 28% of consolidated revenues (36% in CY04). This was largely owing to the severe competition and price erosion in these markets on the back of a considerably lower number of patent expiries. However, Ranbaxy’s total prescription growth in this region increased by 26% YoY, beating the industry growth of 17%.

During the year, the company made 26 ANDA (abbreviated new drug application) filings and received approvals for 16 ANDAs. The total cumulative ANDAs now stand at 170, with 59 pending approvals. Ranbaxy’s product pipeline is the second largest in the US market, which indicates the potential growth prospect from this region in the form of new drug launches. However, while pricing pressure is expected to continue in CY06 as well, it is expected to be less severe, especially from 2QCY06 onwards, with a number of blockbuster drugs going off patent and consequently more product launches expected from Ranbaxy.

On the Para IV front, the court ruled against Ranbaxy with regards Pfizer’s ‘Lipitor’, with Ranbaxy planning to appeal the decision. Also, a US court upheld the injunction slapped against Ranbaxy with regards to the launch of the generic version of Pfizer’s ‘Accupril’.

Geographical snapshot
(Rs m) 4QCY04* 4QCY05* Change CY04** CY05** Change
Formulations            
North America 5,752 4,303 -25.2% 19,294 14,685 -23.9%
Europe, CIS and Africa 3,640 4,167 14.5% 13,406 14,774 10.2%
India 2,382 2,717 14.1% 9,828 10,496 6.8%
Asia Pacific & Middle East 719 861 19.7% 2,627 2,999 14.2%
Latin America 494 453 -8.4% 2,174 1,852 -14.8%
Sub total 12,988 12,500 -3.8% 47,328 44,806 -5.3%
APIs 854 1,223 43.2% 4,438 5,689 28.2%
Allied businesses 404 272 -32.8% 1,404 1,455 3.7%
Net sales 14,246 13,995 -1.8% 53,170 51,950 -2.3%
* For 4QCY04 - 1US$= 44.94, for 4QCY05 - 1US$= 45.29
** For CY04 - 1US$= 45.29, for CY05 - 1US$= 44.10

Europe is a mixed bag: The European region witnessed mixed fortunes and reported 5% YoY growth for the full year. Germany performed strongly with a 20% YoY growth in revenues. However, revenues in the UK fell by 11% YoY due to a competitive pricing environment. It must be noted that market conditions in the UK are more or less similar to that in the US. Sales in the French region were flat owing to regulatory changes in the country. Having said that, Rest of Europe clocked a healthy 23% YoY growth in revenues. One of the key highlights in Europe was the day one launch of ‘Sertraline’ in 7 EU countries including the larger markets of Germany, France and the UK. In the UK too, the court ruled against Ranbaxy finding Pfizer’s patent on ‘Lipitor’ to be valid.

Healthy growth in India: India grew by 9% YoY during the full year cornering a market share of 4.9%. This growth is commendable considering the VAT related concerns, which affected the company during the first quarter. The strong growth was on the back of the company’s continued focus on strengthening its chronic therapy portfolio. This portfolio contributed 20.3% to domestic revenues (up from 18.8% in the corresponding period last year). Within this, the company’s CVD (cardiovascular plus diabetes) and Urology folio grew by 23% (industry growth: 11%) and 30% (industry growth: 16%) respectively. In a bid to further strengthen its urology portfolio, Ranbaxy entered into a co-marketing agreement with Ferring International of Switzerland, for marketing its urology product ‘Desmopressin’ in the Indian market.

The BRIC (excluding India) picture: This region excluding India performed well during the year. While Russia and the CIS countries grew by 43% YoY, China grew by 25% YoY. It must be noted that this was the first year when the Chinese operations recorded profits after the company undertook various restructuring initiatives. Brazil sales, however, declined by 26% YoY due to competitive pressures.

Sharp contraction in margins: Operating margins registered a steep decline in CY05 to 7.4% as against 18.1% in CY04. This was due to a considerable rise in the R&D expenditure and legal costs incurred by the company. During the year, the R&D expenditure, increased 39% YoY, accounting for 8.8% of consolidated sales (6.2% of sales in CY04). Ranbaxy also incurred US$ 30 m in legal costs during the year. Increasing competition in the generics space has also led to lower realizations and consequently lower margins. Slower growth in sales and decline in the operating margins has been reflected in the bottomline which fell by 63% YoY. The bottomline fall was further magnified by 81% YoY fall in other income and 98% YoY rise in interest expense.

Over the last few quarters
(%) 3QCY04 4QCY04 1QCY05 2QCY05 3QCY05 4QCY05
Net sales growth 12.2% 18.6% -12.1% 5.0% -5.8% -0.3%
Operating profit margin 23.0% 15.4% 10.8% 12.6% 2.4% 4.6%
Net profit growth 7.1% -10.8% -62.9% -48.3% -90.8% -56.2%

What to expect?
At the current price of Rs 383, the stock is trading at a price to earnings multiple of 16.0 times our estimated CY07 earnings. While CY05 has been a challenging year for Ranbaxy, we believe that CY06 is expected to be relatively better. It must be noted that while the pricing pressure is expected to continue in CY06 as well, the company is planning to counter the same on the back of an increased product flow. This product portfolio includes the launch of the two drugs ‘Pravastatin’ and ‘Simvastatin’. Ranbaxy is looking for a 180-day exclusivity for Pravastatin 80 mg and Simvastatin 80 mg (the latter is under litigation). A clear picture on the status of these two drugs is expected to emerge in 1QCY06.

Besides an increased product flow, we believe that a wide and expanding geographical reach will also lead to a growth in revenues in the long-term. In addition, the company is undertaking several cost cutting initiatives especially on the manufacturing front in a bid to spruce up margins. Despite increased challenges in the generics business, we remain positive on the company’s growth prospects from a long-term perspective.

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