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Research holds the key - Views on News from Equitymaster
 
 
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  • Apr 19, 1999

    Research holds the key

      Circa 1994 - Ranbaxy sets up a new state-of-the-art laboratory in Gurgaon, Delhi. Not many are impressed. Will an Indian pharma company actually conduct original research? Will the development time and costs pay off?

      Circa 1999 - Ranbaxy's stock has risen by over 311 percent since the start of the year. Why? The company's research centre has successfully implemented a new drug delivery system for a major multinational company. New reports estimate that payments from royalties and development charges could top $100 million over the next 5-7 years.

      'Made in India' research pays off...
      Ranbaxy's new research-based drive has made analysts sit up and take notice. And how! From a market cap of $ 711 million at the start of this year, the company now trades at a P/E multiple of 119 and commands a market value of $ 2.9 billion. And they are still saying 'BUY'. The story is not only about the stock price, the results too have started showing. Figures for the second quarter ended June 1999 revealed 17 percent top line growth and 16 percent growth at the net profit level.

      For a company that was once regarded as one with slow domestic brands, and low margin bulk drugs in the export market, the change of image has not come easy, or cheap. Ranbaxy (market capitalisation: $ 2.9 billion) is valued today as a research and development (R&D) driven company, more importantly in a sector dominated by multinational companies. In fact the company spends close to 6 percent of its sales on research and development.

      Incorporated in 1962, Ranbaxy (financial year 1999 revenues, $ 260 million) is India's largest pharma company in terms of total sales, and accounts for the third largest slice (after Glaxo and Cipla) of the domestic pharma pie. It derives 66 percent of its revenues from value-added formulations with bulk drugs making up the balance. Ranbaxy operates six manufacturing plants across the world and has set up about 20-odd joint ventures and subsidiaries globally. Chief amongst these are ventures in the United States, Ireland, UK, Netherlands, China and Russia. Not surprisingly, it derives about 44 percent of its revenues from the export of its pharmaceutical products (mainly bulk drugs).

      Management pro-active to change...
      Ranbaxy has taken conscious steps to consolidate its position in the post-GATT era (where product-based patents as against process-based are recognised). These include launching new products and establishing brands locally. Its merger with Croslands Research in 1997 and acquisition of seven brands from Gufic were all steps in this direction. In 1998, it launched 20 new products, of which, a few met with reasonable success. To strengthen its domestic market share, Ranbaxy also entered into marketing arrangement with Cipla, Glaxo and HMR. For its global effort, Ranbaxy acquired two units (Ohm Labs, New Jersey) and Rina Pharmaceuticals, Ireland) and also bought out marketing rights for Natco's brands in CIS and Kazhakastan. It also entered into a 50:50 joint venture with Schein in the US for marketing generics.

      The US market figures prominently in Ranbaxy's overall company strategy. (Have a look at this week's sector note). Ranbaxy has already filed 6 Abbreviated New Drug Approvals (ANDA), - pre-conditions to enable it to market its generics in the US. Over the next 12 months, the company has plans to file ANDAs for another 10-12 generics.


      Ranbaxy's strong background in chemical synthesis and reverse engineering will help it develop generic equivalents for the drugs going off patent. Besides its low cost of production will enable it to effectively compete with other international companies. To get around competition, Ranbaxy has tied up with existing players wherever possible. It has tie ups with Schein, Barr, Mallinckrodt and Zenith Golden for marketing its generic products in the US.

      NDDR, success story?
      However the most promising story about Ranbaxy is of the success it has tasted with the Novel Drug Discovery Research (NDDR) programme. In NDDR, Ranbaxy filed its first investigational new drug (IND) patent application for a new molecule in October 1998, and is currently conducting Phase-I of clinical trials of the product in India. Licensing of the molecule post-testing could reap rich rewards for the company, and could be substantially high considering that the international market for the product is expected to be about $ 3 billion by 2003. The company's research division has plans to launch a new IND every 18 months.

      There are a few concerns though. With 20 JVs in as many countries, there is a feeling that the Ranbaxy may have spread itself too thin. Also, the figures for license of its new IND are based on market expectations and the company has so far not made any official announcement to the effect. In any case, with prices of bulk drugs picking up in the domestic market, and exports of formulations looking better, this company looks set to reap the dividends of its fundamentally strong position. Its foray into basic research, though expensive, may eventually prove to be the major revenue driver for the company in the years to come.

       

       

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