Ranbaxy: Billion dollar baby!

May 17, 2006

Ranbaxy has been in the limelight recently after a US court termed the US FDA’s decision ‘unlawful’, opening the door for the lucrative 180-day exclusivity period for ‘Simvastatin’. In this article, we shall take a look at two of Ranbaxy’s first-to-file (FTF) opportunities and the likely impact on revenues, should these opportunities materialise.

Going the Para IV way

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Considering the competitive pricing environment prevailing in the US generics market, generic companies are increasingly looking to augment revenue streams by increasing the pace of Para IV filings. That said, the same is fraught with risks, since the benefits from the same depend upon the outcome of litigation, which in turn entails higher legal expenses. While Ranbaxy has been stepping up its Para IV filings, the company is also focusing on Para III filings in a bid to ensure stability in revenues. Investors should note that we have not factored in any upside from these 180-day exclusivities, unless and until the US FDA grants the same.

Ranbaxy's potential FTF opportunities

Generic drug	Brand name	Indication	Innovator	Sales (US$ m)	Other challengers
Pravastatin	Pravachol	Cholesterol	BMS	1,800	Teva, Apotex and Genpharm
Simvastatin	Zocor	Cholesterol	Merck	5,000	Teva/Ivax
Atorvastatin	Lipitor	Cholesterol	Pfizer	10,000	None
Esomeprazole	Nexium	Anti-ulcer	AstraZeneca	4,633	None
Fenofibrate	Tricor	Cholesterol	Abbott	1,020	Teva, Par and Cipher
Valacyclovir	Valtrex	Herpes	GSK	1,040	None
Pioglitazone	Actos	Anti-diabetes	Takeda		Alpharma, Mylan, Teva and Watson
Tamsulosin	Flomax	Urology	Boehringer	773	None

Source: Ranbaxy presentation, US FDA, Equitymaster research

Pravastatin (Pravachol)
Pravastatin is a blockbuster drug (US$ 1.8 bn in revenues) belonging to the billion dollar statin class (for reducing cholesterol). This drug belongs to the innovator, BMS. It must be noted that the drug went off patent on April 20, 2006 with Teva receiving the 180-day exclusivity on 10 mg, 20 mg, and 40 mg strengths. Ranbaxy is gunning for the 180-day window on 80 mg dosage form and is currently awaiting US FDA approval for the same. The market size of the 80 mg strength is US$ 220 m. In the event that it is granted the 180-day exclusivity and assuming 50% price erosion and a 35% market share, the drug will contribute around US$ 19 m (Rs 836 m) to Ranbaxy’s topline in CY06. Post the exclusivity period, prices will erode at a much faster clip as more players enter the fray.

Simvastatin (Zocor)
Simvastatin is a US$ 5.0 bn dollar a year drug, belonging to Merck and is scheduled to go off patent in June 2006. While Ivax (acquired by Teva) had the FTF claim on the 5, 10, 20 and 40 mg strengths, Ranbaxy has a FTF claim on the 80 mg strength (US$ 500 m in revenues). Teva and Ranbaxy had, however, not challenged the main patent and as a result, were entitled to the 180-day exclusivity after patent expiry of the main compound. With Merck later de-listing the challenged patents, the US FDA refused to grant exclusivity on the same. In recent developments, a US court termed the US FDA’s decision as ‘unlawful’, which means that Teva and Ranbaxy can hope to secure exclusivity on this drug. That said, the US FDA has still to come with a final decision on the issue. It may further be recalled, that Merck had entered into a 180-day exclusivity deal with Dr.Reddy’s for the drug.

Generally, authorised generics tend to garner a higher market share as compared to the challenging company as they have the backing of the innovator. From Ranbaxy’s perspective, in the event of the 180 day exclusivity being granted, and assuming a 50% price erosion and a 35% market share, the drug will contribute around US$ 43 m (Rs 1.8 bn) to Ranbaxy’s topline in CY06.

FTF opportunities in a nutshell
Ranbaxy’s total cumulative ANDAs now stand at 170, with 111 product approvals and the remaining 59 pending approvals. This makes Ranbaxy’s product pipeline the second largest in the US generics market (after Teva), indicating the potential in the long-term. Out of these, 18 are potential ‘first-to-file’ opportunities (FTFs) representing a market size worth US$ 22.2 bn. It must be noted that out of these 18 FTFs, currently 6 are under litigation (including the ‘Lipitor’ suit, which Ranbaxy has lost). The remaining 12 molecules on which Ranbaxy has not been sued represent a market of around US$ 9.7 bn in innovator sales. However, these opportunities, if approved by the US FDA, will unravel over a period of three to five years.

What to expect?

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At the current price of Rs 478, the stock is trading at a price to earnings multiple of 20 times our estimated CY07 earnings (without considering Terapia), which is at the higher end of our valuation spectrum. After a forgettable CY05, CY06 and beyond is expected to be relatively better for Ranbaxy. While the pricing pressure in the US is expected to continue in CY06 as well, the company is planning to counter the same on the back of an increased product flow. In addition, the company is undertaking several cost cutting initiatives in a bid to spruce up margins. We shall soon update our research report on the company.