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Ranbaxy: Generics Powering Growth - Views on News from Equitymaster
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  • Jun 16, 2003

    Ranbaxy: Generics Powering Growth

    Indian pharma majors have been preparing for the post 2005 regime for some time now. One of the most aggressive among them is Ranbaxy, India’s largest pharmaceutical company. Traditionally, Ranbaxy has been a therapeutic segment oriented company. However, it is among the first to take a lead in pharma R&D in the country. In this article, we shall analyse the business structure of the company and its growth prospects.

    Ranbaxy is primarily into export of generics. In 2002, generics constituted 86% of Ranbaxy’s total revenues up from 76% if 2001. The remaining 14% was accounted for by the API (bulk drugs) sales and allied activities. This is a healthy shift as the margins in generics sales are higher as compared to APIs.

    Therapeutic distribution of global generics sales (%)
    Therapeutic Segment Dec-99 Dec-00 Dec-01 Dec-02
    Anti-Infectives 54.5 56.4 57.7 61.7
    Cardiovasculars 3.4 4.9 6.3 6.5
    Central Nervous System (CNS) 2.4 2.5 4.2 4.2
    Dermatologicals 5.5 4.1 3.7 3.3
    Gastro Intestinal Tract 9.1 8.8 8.3 7.5
    Nutritionals 8.6 8.8 6.8 4.4
    Orthopedics/Pain Management 9.6 9.5 6.6 5.6
    Others 6.9 5 6.4 6.8
    (Source: Ranbaxy Annual Reports)

    As can be seen from the table, in therapeutics, anti-infectives still dominate Ranbaxy’s portfolio. Ranbaxy’s Cephalosporin range of brands contributed to 31% of the company’s global anti-infectives sales. The company has, however, started gradually increasing its focus on lifestyle segments like cardiovasculars and CNS. Cardiovasculars generated revenues to the tune of US$ 42.7 m in 2002, while the CNS segment notched up revenues of US$ 28.4 m. The global CNS market was at US$ 52 bn in 2001, and is expected to be around US$ 77 bn by 2007, representing a CAGR growth of 6.8%. Ranbaxy, as a result, stands to gain in the future.

    Apart from Ranbaxy’s entry into high value lifestyle segments, exports have also played a bigger role in its growth (70% of revenues). USA is emerging as the major export market for the company with revenues to the tune of US$ 296 m (39% of sales). Ranbaxy has been ranked the second fastest growing generics company in USA. In Brazil, Ranbaxy has achieved sales of US$ 32 m in its second year of operation and has launched 19 new products (15% market share in the generic market in Brazil). Europe too saw strong growth and recorded sales of US$ 30 m. In China, however, massive price cuts announced by the State Drug Pricing Company has resulted in Ranbaxy suffering losses in FY02.

    Financial overview
    (Rs m) Dec-99 Dec-00 Dec-01 Dec-02
    Revenues 16,670 17,885 20,518 30,110
    PAT 1,969 1,824 2,520 6,236
    OM (%) 14.7 12.5 14.7 22.2
    NM (%) 11.8 10.2 12.3 20.7
    R & D (% of Revenues) 2.8 2.9 3.2 5.6

    Apart from generics, R&D has emerged as the other thrust area. The company’s R & D expenditure has increased from 2.8% of revenues in 1999 to 5.6% in 2002. It has made 115 patent applications in 2002 as against 46 in 1999.

    Ranbaxy’s NCE Pipeline
    Therapeutic Segment Stage of Development
    Early Discovery IND Filed /
    Clinical Trials
    Phase 1 Phase 2
    Urology - BPH RBx 6198, RBx 9001 - RBx 2258 (UK) RBx 2258 (India)
    Urology -
    Urinary Incontinence
    RBx 9841 - - -
    Respiratory   - RBx 7796 -
    Anti - Bacterial RBx 8700 RBx 7644 RBx 7644 -

    Read more on pharma R&D

    It is estimated that the global generics market will grow at the rate of 10% to 12%, with drugs having estimated sales of US$ 55 bn to 65 bn going off patent in the next five years. This indicates huge growth potential for Ranbaxy, as it will be able to capture a reasonable share of this market. Also, with pressure to reduce the health care costs in USA, the US government will be under pressure to speed up the generics approval procedure, thereby further helping Ranbaxy’s growth.

    However, there are some caveats.

    • Since Ranbaxy is required to comply with strict regulatory requirements, legal expenses are bound to rise.
    • Currently, the key revenue driver is the therapeutic segment. Recently, it has started showing stagnant growth rates, which is a cause of concern.
    • With the company now undertaking research in new drug discovery, the risk of the NCE failing in any of the clinical stages is very high and could result in the loss of huge R & D expenditure.

    The stock currently trades at Rs 723 implying a P/E multiple of 19.3x annualised 1QFY04 earnings. Ranbaxy has a strong NCE pipeline. It’s Urology–BPH molecule RBx 2258 is currently undergoing Phase 2 Clinical Trials in India and Phase 1 Trials in UK (Licensed to Schwarz Pharma). Besides, it has 4 molecules in the early discovery stage. Ranbaxy has filed 25 ANDAs in 2002 as against 10 in 2000.

    Considering Ranbaxy’s strong growth potential in the generics segment combined with the strong NCE pipeline and ANDAs, one is optimistic over the long-term. However, the risk profile of the stock is also on the higher end given the inherent risks involved in NCEs and complex regulatory procedures on the ANDA front.



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