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Ranbaxy: Forex plays spoilsport
Apr 22, 2008

Performance summary
  • Revenues grow by 7% YoY in 1QCY08, driven by strong performances in the US, India, Latin America and the emerging markets.
  • EBIDTA margins expand by 2.9%, largely due a significant reduction in raw material costs (as percentage of sales).

  • PAT grows by a staid 6% YoY, led by substantial forex losses despite the extraordinary income of Rs 895 m. Excluding the impact of both, net profits grow by a robust 75% YoY.

  • Enters into a settlement with AstraZeneca for the latter’s anti-ulcer drug ‘Nexium’, which is currently the second largest selling drug in the word with revenues of US$ 5.5 bn.

Financial performance: A snapshot
(Rs m) 1QCY07 1QCY08 Change
Net sales 15,821 16,986 7.4%
Expenditure 13,913 14,434 3.7%
Operating profit (EBDITA) 1,908 2,552 33.8%
EBIDTA margin (%) 12.1% 15.0%  
Other income 604 (713)  
Interest (net) 313 384 22.7%
Depreciation 557 621 11.5%
Profit before tax 1,642 834 -49.2%
Tax 355 361 1.7%
Extraordinary items - 895  
Profit after tax/(loss) 1,287 1,368 6.3%
Net profit margin (%) 8.1% 8.1%  
No. of shares (m) 373.0 373.0  
Diluted earnings per share (Rs)*   21.3  
Price to earnings ratio (x)*   22.8  
(*on a trailing 12-months basis)

What has driven performance in 1QCY08?
  • Revenues from the US registered a strong 16% YoY growth (in dollar terms) during 1QCY08, which was led by new product launches, continuing volume growth across generics, branded generics and OTC segments. During the quarter, Ranbaxy introduced 5 new products out of which 4 were in generics and 1 was in the OTC space. In the branded generics segment, the company’s key brand ‘Sotret’ remained the leader in its respective product category with 53% market share. The overall market share of Ranbaxy in the US generics market (in the molecules in which it is present) as per the February 2008 data stands at 11.3% as against 10.3% in the trailing quarter. Ranbaxy’s cumulative ANDA filings now stand at 240 with 142 product approvals. 98 ANDAs are pending approval, the market size of which has been pegged at US$ 55 bn and these comprise a mix of plain vanilla generics, niche and potential first-to-file (FTF) products. The company has FTF status on 19 products valued at innovator market size in excess of US$ 27 bn out of which it has been litigated on 7 products.

  • Ranbaxy has entered into a settlement agreement with AstraZeneca for the latter’s anti-ulcer drug ‘Nexium’. This agreement will enable Ranbaxy to launch the drug with a 180-day exclusivity under a license from AstraZeneca from May 27, 2014. Besides this, Ranbaxy and AstraZeneca have also entered into an agreement under which Ranbaxy will formulate a significant portion of AstraZeneca’s US supply of ‘Nexium’ from May 2010, including provisions for the manufacture of ‘Esomeprazole magnesium’, which is the API, from May 2009. ‘Nexium’ is currently the second largest selling drug in the world with revenues of US$ 5.5 bn.

  • The European region began the year on a dismal note with revenues declining by 11% YoY (in dollar terms) during the quarter. Revenues from the key markets of the UK, France and Germany remained flat. While revenues from Germany grew by 9% YoY, UK and France reported a 7% YoY and 6% YoY decline in sales respectively. Both these regions are expected to witness growth going forward aided by new product launches. Romania proved to be a damp squib registering a 29% YoY decline in revenues. This was owing to uncertainty in the market due to the proposed healthcare reforms and the re-introduction of branded prescribing, which has been introduced from April 1, 2008.

    Geographical snapshot
    (US$ m) 1QCY07 1QCY08 Change
    Formulations      
    India & Middle East 78 91 16.7%
    CIS (Russia and Ukraine belt) 18 24 33.3%
    Rest of Asia Pacific 18 25 38.9%
    Asia Pacific total 114 140 22.8%
    North America (US & Canada) 91 110 20.9%
    Europe (including Romania) 93 83 -10.8%
    Africa 24 31 29.2%
    Latin America 9 16 77.8%
    Sub total 331 380 14.8%
    APIs 23 30 30.4%
    Net sales 354 410 15.8%

  • Revenues from the domestic market clocked a 16% YoY growth (in dollar terms) during the quarter led by 12 new product launches and an increasing share in the chronic therapy product basket (24% in February 2008 as against 21% in the corresponding period last year). The chronic portfolio grew by 28% as against the market growth rate of 21%. Ranbaxy’s Global Consumer Healthcare business recorded a 28% YoY growth in sales led by the strong performance of the company’s flagship brand ‘Revital’, which increased its market share to 82%.

  • While CIS grew by 29% YoY, revenues from Africa grew by 28% YoY, led by South Africa, which registered an impressive 68% YoY growth. Brazil posted a healthy 75% YoY growth during the quarter and was matched by the rest of Latin America, which grew by 77% YoY. Japan also contributed by posting a healthy 51% YoY growth during the quarter. The company received approval to launch ‘Amlodipine’, which has a market size of US$ 2 bn in Japan as per the IMS-MAT data for December 2007.

  • Operating margins improved significantly by 2.9% largely due to the reduction in raw material costs (as percentage of sales). Despite the robust 34% YoY growth in operating profits, the bottomline growth at 6% left a lot to be desired despite the extraordinary income of Rs 895 m that the company received on the sale of surplus land and buildings. This was attributed to the huge forex losses of Rs 800 m that Ranbaxy incurred during the quarter as against considerable forex gains of Rs 560 m in 1QCY07. Having said that, if one were to exclude the extraordinary income and the forex impact, net profits have clocked a strong 75% YoY growth.

What to expect?
At the current price of Rs 486, the stock is trading at a multiple of 14.7 times our estimated CY10 earnings. Despite the fact that the pricing pressure in the US market is expected to continue going forward, backed by increased competition, we expect Ranbaxy to counter the same led by an increased product flow. As far as Para IV filings are concerned, the company has adopted a strategy that will provide some semblance of certainty in terms of product launches going forward. For instance, Ranbaxy is sure of getting the exclusivity period for the blockbuster drugs ‘Imitrex’ in CY08, ‘Valtrex’ in CY09, ‘Flomax’ and ‘Lipitor’ in CY10. The settlement deal signed with AstraZeneca for the latter’s US$ 5.5bn drug ‘Nexium’ is an added feather in Ranbaxy’s cap.

Besides this, we believe its focus on the branded and emerging markets will play a significant role in offsetting the difficult conditions in the developed markets thereby bolstering its overall performance. While regulatory changes in various countries are a key risk that could impact performance going forward, Ranbaxy is countering the same by increasing its geographical reach worldwide. The company has identified biotech as an important opportunity as is evinced by the stakes it has bought in three biotech companies in India. While this is a step in the right direction, it will be a while before revenues from this field make any significant contribution.

Ranbaxy also announced picking up 14.69% stake in Orchid Chemicals the details of which have not yet been divulged. While the company has stated a business alliance agreement with Orchid involving multiple geographies and therapies for both finished dosage formulations and active pharmaceutical ingredients, more clarity has yet to emerge on this deal. Overall, we maintain our positive view on the stock.

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