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Ranbaxy: Giant in the making…

Jun 9, 2004

Ranbaxy, undoubtedly the leader (in terms of size) in the Indian pharmaceutical industry is one of those companies, which over the last ten years has rewarded its shareholders well. Rs 100 invested in the stock in the July 1995 would have outperformed the benchmark BSE-Sensex by almost three and a half times, at a CAGR of about 18%.

Ranbaxy with its vision to create a global pharma giant has consistently outperformed the markets in terms of growth in sales and profits. The net profit of the company has grown by almost 9 times (standalone) in a period of 10 years while the sales has grown by 4 times on standalone basis and 6 times on a consolidated basis.

Let's look at the company's profile and its business model. In the early 1990's Ranbaxy started focusing on the exports market for expanding its business. Started as a bulk drug supplier it found a big opportunity to cater to the growing demand of generic drugs in the US markets. It is currently the 9th largest generic drugs company in the US market and is growing with phenomenal pace. The company has a presence in US generics market with 65 branded generic products and USFDA approval of 83 ANDA's, which means that the company can launch another 18 drugs in the market. Company has grown in the US market at a 91% CAGR in last two years which includes market exclusivity for Cefuroxime Axetile.

In European markets Ranbaxy started with the UK market by launching the generic version of Ranitidine in the year 1998. Its entry in to the German market was marked by its acquisition of the generics business of Bayer AG in 2000. The German market, is the world's third largest generics market. The company is also present in other countries like France, Japan, Russia, China, Malaysia Brazil and many other countries in Middle East, Latin America and Asia Pacific.

Coming to the business mix of the company. Over the years the business mix of the company has changed and along with it the profitability ratios have also seen a change. The company has come of age and moved from a dominant Bulk drug manufacturer to a branded formulations player. Bulk drugs, which constituted about 44% of the revenue five years back, are down to 22% now, which has led to the improvement in the operating profit margin of the company. The operating margin, which was in the range of 18-19% five years back, has now improved to the 25-27% range. The following chart shows how the fall in bulk drug contribution led to rise in OPM. This is significant considering the fact that the company is further going to concentrate upon the generics business which is likely to further improve the margins although not in the same quantum as happened earlier.

The greatest advantage of Ranbaxy in the international markets is its presence across the value chain of the pharma industry. The company makes its own chemicals, bulk drugs and formulations and has its own marketing network in important markets. This makes it a cost-effective producer of generic drugs leading to a significant competitive advantage over its peers in the US and European markets.

In the Indian stock markets it is certainly among the top 3 companies with a strong field presence and more importantly good brand equity and brand recall. It has a very strong presence in the anti-infective segment, which constitutes about 20% of the total pharma market in India. The company in the quarter ending March 2004 has out performed the market in anti infective, gastrointestinal and Dermatological segment in the industry. Although the company is not so strong in other fast growing segments such as cardiovascular, anti-diabetes and CNS, Ranbaxy has one of the strongest field forces and it would be a matter of time before it gains market share in these segments.

On R&D front, Ranbaxy, is one of the major spenders with a total expenditure of about 6% of its consolidated sales. It is one of the very few companies which has acquired platform technology in novel drug delivery systems. In fact it is only company in India which has got R&D activity going on in NDDS segment and has achieved significant success such a one time in a day dose of Ciprofloxacin and oral suspension of Metmorfin. On NCE front RBx 2258 (urology segment) is in the later stages of clinical trial phase II.

At Rs 1006, the stock is trading at a P/E of 25x FY05 expected earnings. Being a leading domestic pharma company and with a host of R&D initiatives the company seems to be a good position to cater to the Indian pharma sector as well as the generics markets in US and Europe. In the long run the company can graduate from being a pure generic player to a specialty pharma company with patented products. While the journey to becoming a patented products company may be long and difficult, we believe that Ranbaxy possess the requisite skills and drive to become a global pharma major. However investors need to realise these initiatives by the company may take time to fructify, hence long-term investment is the key.

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