Dr. Reddy’s Vs Ranbaxy Vs Teva - Views on News from Equitymaster

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Dr. Reddy’s Vs Ranbaxy Vs Teva

Jun 27, 2003

‘Generics’ has been the buzzword among Indian pharma majors for some time now, and not without reason. There exists significant potential for generics manufacturers in the regulated markets. Two Indian generics majors, Ranbaxy and Dr. Reddy’s (DRL), have been increasingly focusing on this market for sustained growth. But what would the future hold for companies that follow this business strategy? To get an understanding of the same we have compared two Indian generic companies with a global leader in the generic markets – Teva Pharmaceutical Industries Ltd.Teva is an Israeli pharmaceutical company specialising in the development, production and marketing of generics drugs. The company registered sales of US$ 2.5 bn in 2002, with North America and Europe contributing 89% of its revenues. Teva has also tasted success on the patented drugs front. The company is the developer and world wide exclusive rights holder for Copaxone, which is used for the treatment of multiple sclerosis. The drug notched revenues of US$ 539 m in 2002.

Let us now briefly compare the three companies on various parameters.

Financial comparison ($ m)
 Teva (Dec 02) Dr Reddy's (Mar 03) Ranbaxy (Dec 02)
Net sales 2,519 380 764
Sales growth (4 years CAGR) 25.2 53.722.8
Operating Profit60091170
OPM (%)23.828.322.2
PAT41074125
PAT growth (4 years CAGR)52.080.346.9
NPM (%)16.319.516.4
R&D as % of revenue7.77.65.6

Teva is way ahead of its Indian counterparts in respect of revenues and profits. This is mainly on account of the sale of patented drug Copaxone and due to higher number of ANDA approvals. However, despite the above, in terms of efficiency and growth, there is little difference between the three companies. While DRL leads the pack in terms of operational and net profit margins, the difference between Ranbaxy and Teva is negligible.

With respect to R&D spendings as a percentage of sales, DRL is at par with Teva, while Ranbaxy lags behind. However, Teva receives grants from the Israel government and third party research participants for R&D spendings. If these are excluded, R&D as a percentage of revenues will drop to 6.6% from 7.7%. This indicates that the Indian companies are in the right direction.

Geographical revenue distribution (%)
 Teva (Jan 03-Mar 03) Dr. Reddy's (FY03) Ranbaxy (FY03)
USA643238
Europe2587
ROW116055

Moving away from the financials of the three companies, let us now examine the quality of business done by them. US generics market is key to the growth for all three companies. However, while Teva has 64% of its revenues coming from USA, DRL and Ranbaxy have only 32% and 38% respectively of their revenues from USA. This is primarily due to a larger generics portfolio of Teva as compared to DRL and Ranbaxy. Teva has had more successes as far as Para IV ANDA filings are concerned. In 2002, Teva made 39 Para IV ANDA filings as against 10 and 7 by DRL and Ranbaxy respectively.

ANDA filings in 2002
 ApprovedPending approval
Teva4811
Dr. Reddy's113
Ranbaxy1123

In terms of overall ANDA (all 4 paras) filings and approvals in the US, Teva is again way ahead of its Indian counterparts. In 2002, where Teva made 59 ANDA filings, DRL and Ranbaxy could manage only 14 and 34 filings respectively. However, DRL and Ranbaxy are increasingly focusing on raising the total number of ANDA filings and also improving the approvals to filings ratio.

NCE Pipeline
 ResearchPre ClinicalClinicalPre FilingMarketed
Teva 21611
Dr. Reddy's84200
Ranbaxy42300

All the three companies have recognized the importance of New Chemical Entities (NCE) and new drug discovery. Teva has already developed and marketed its first patented drug Copaxone, which is used for the treatment of multiple sclerosis. Besides this, Teva has another drug Rasagiline for the treatment of Parkinson’s disease, which has completed the three phases of clinical trials and is being submitted for regulatory approval with the US authorities. DRL and Ranbaxy have started late in this field and hence most of their NCEs are in the early discovery stage or in the various clinical testing phases. However, a higher number of drugs in the initial research and pre-clinical stages indicate the two companies resolve for improving their position in new drug discovery research.

Valuations
 TevaDr. Reddy'sRanbaxy
P/E36.220.221.2
ROE22.431.5*34.6
ROA8.927.5*24.0
* FY02 figures

On the valuations front, we see that at current prices, DRL and Ranbaxy are getting a lower valuation as compared to Teva. This is probably due to the fact that the markets have factored Teva’s patented product Copaxone and larger generics portfolio into the price. Taking this into account and considering the similar business structure and the faster growth rates that the Indian companies are recording, there is good potential going forward for both DRL and Ranbaxy.

Thus, while there is no comparison possible of DRL and Ranbaxy with Teva as far as size is concerned, in terms of efficiency and growth, the three companies are almost at par. DRL and Ranbaxy also have given a direction to their business. Although the two Indian companies are at a very nascent stage as compared with Teva, the size of the Israeli MNC is a good indicator of what DRL and Ranbaxy could achieve in the long term. Thus we reiterate what we have always been saying, 'Do not base your decision on the outcome of litigations'.


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