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Ranbaxy: US, India jointly hit 1Q

Apr 28, 2005

Introduction to results
Ranbaxy Laboratories, India's largest domestic pharma company, has seen its growth juggernaut halted in the first quarter of 2005. The company has reported nearly 13% dip in 1QCY05 consolidated revenues led by sluggishness in India owing to VAT and excise related blues, as well as lacklustre US and EU region performance. Profits for the quarter shrunk by a significant 63% YoY. The detailed table from the company is awaited and we will put it up as soon as it comes in.

(Rs m) 1QCY04 1QCY05 Change CY03 CY04 Change
Net sales 13,470 11,835 -12.1% 48,231 54,608 13.2%
Expenditure 10,423 10,560 1.3% 37,478 43,112 15.0%
Operating profit (EBDITA) 3,047 1,275 -58.2% 10,753 11,496 6.9%
Operating profit margin (%) 22.6% 10.8%   24.8% 21.1%  
Other income 55 31 -43.6% 486 239 -50.8%
Interest 107 138 29.0% 252 464 84.1%
Depreciation 401 326 -18.7% 1,191 1,536 29.0%
Profit before tax 2,594 842 -67.5% 9,796 9,735 -0.6%
Extraordinary items 0 0   351 0  
Minority interest 3 3        
Tax 685 131 -80.9% 2538 2290 -9.8%
Profit after tax/(loss) 1,906 708 -62.9% 7,609 7,445 -2.2%
Net profit margin (%) 14.1% 6.0%   15.8% 13.6%  
No. of shares (m) 185.7 185.7   185.7 185.7  
Diluted earnings per share (Rs)* 41.1 15.3   41.0 40.1  
P/E ratio (x)         22.6  
(* annualised)            

What is the company's business?
Ranbaxy is the largest pharmaceutical company in India. Its annual sales crossed US$ 1 bn in the year 2004. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). It is a research driven company, with 6% of revenues going towards it. The continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. Its foray into Novel Drug Delivery Systems has led to proprietary 'platform technologies' resulting in a number of products under development, with one product Cipro OD in market.

Ranbaxy's continued focus on European and US markets has helped it build deep product pipelines in both the markets. The company has about 151 ANDA filings out of which 99 have been approved by USFDA and 52 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 1QCY05?
US: Quinapril blues
US, which accounts for over 30% of the company's consolidated revenues, reported a significant 24% decline in 1QCY05 revenues YoY. The geography continued to remain soft and the company also had to discontinue sales of its generic product, Quinapril, to Teva (Israel) and take back unsold stocks from it. This was owing to a US court decision, which stopped Teva and Ranbaxy from selling the generic version in the US. The company has appealed against the judgment. Apart from this, the company's other products continued grow decently, but competitive pricing continues to keep the region under duress.

The company has received approvals for 3 more ANDA's from the USFDA, taking the total number of approved ANDA's to 99. The total cumulative product filings now stand at 151, with 52 pending approval. The pipeline of the company is one of the largest in the US market, which indicates the potential growth prospect from this region in the form of new drug launches.

Europe: Consolidating but near term sluggishness
In Europe the company's performance was again not too enthusing for the quarter, with revenues declining 10% YoY. The key markets of UK, France and Germany combined, now constitute 79% of the total EU sales at US$ 35 m (74% in 1QCY04). While the UK and German operations reported revenues of US$ 11 m and US$ 6 m respectively, the degrowth in these markets was in line with internal expectation due to the absence of any new first day product launches, which by comparison occurred in 1QCY04. The French region however, clocked a 6% growth with revenues of US$ 18 m (7% of consolidated revenues).

The major contributor to revenues from European markets was France, which was owing to the acquisition of RPG Aventis by the company in CY04. The French market is now the third largest for the company after US and India. The company has increased its regulatory filings through various regulatory channels in Europe. With inclusion of 10 more countries in the European Union, Ranbaxy will be able to expand its market with the same regulatory approvals.

During the period, Ranbaxy agreed to pay the Department of Health, UK, 4.5 m Pounds to compensate the NHS towards settlement of the claims brought against the company for alleged anti-competitive cartel conduct in connection with the supply to the NHS of generic drugs between 1996 and 2000. This too is likely to have dented profitability.

India: VAT, excise haunts performance
Coming to India specifically, the company's performance was hit owing to the dealer postponement of purchase owing to VAT and MRP based excise issues. This is has been the case across the domestic pharma industry. Domestic sales declined over 22% during the quarter, highlighting the industry woes. But as maintained earlier, this is a temporary phenomenon and domestic pharma majors will bounce back in the coming quarters.

The company is increasingly focusing on the fast growing lifestyle therapeutic segment. The share of the chronic therapy portfolio has increased to 20.5% of domestic revenues (up from 17.8% in the corresponding period last year). Within this, the company's CVD (cardiovascular plus diabetes) folio grew by 24%, as against 8.6% industry growth rate. The company has launched 28 new products over the past year (8 in dermatology, 7 in gastrointestinal and 5 in orthopaedic segments).

What to expect?
At the current price of Rs 909, the stock trades at a P/E multiple of 16x our CY05 estimates. The company has expanded its presence in top generics markets globally. Ranbaxy's margins are likely to be subdued in the near term. Considering the fact that the pharma market is becoming global, and in light of the new WTO norms, companies like Ranbaxy with strong global presence will be able to benefit from this and grow in the long run. The management has indicated of a pick up in revenue momentum during second half of 2005.

The company's growth drivers will continue to be the US and the European markets. Going forward, Ranbaxy may see strong competition putting pressure on margins, which however, will be compensated by strong volume growth. Apart from that, R&D efforts of the company will also show benefits in the long run. We had recommended a BUY on the company in August 2004, with a price target of Rs 1,300 with a 2-3 year view. We maintain our view considering the strength of the company in delivering results at the global level.

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