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Ranbaxy: Marred by US FDA issues - Views on News from Equitymaster
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Ranbaxy: Marred by US FDA issues
Jul 24, 2009

Performance summary
  • Revenues fall by 1% YoY during the quarter due to the adverse impact on its US business as a fallout of the issues with the US FDA.
  • Operating margins tank to 3% during the quarter due to substantial rise in raw material and staff costs (as percentage of sales).
  • While net profits gallop, the same is due to the extraordinary item of Rs 8 bn during the quarter, which is a reversal of the forex loss booked in 1QCY09 due to the appreciation of the rupee. Excluding the same, the company reports a loss at the net level to the tune of Rs 1 bn.
  • Malvinder Mohan Singh steps down as the Chairman, MD & CEO of the company and Atul Sobti takes over as MD & CEO. Dr. Tsutomu Une of Daiichi Sankyo is appointed as Chairman of the Board of Directors.


Financial performance: A snapshot
(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 18,932 18,792 -0.7% 35,369 34,563 -2.3%
Expenditure 16,025 18,223 13.7% 30,459 33,971 11.5%
Operating profit (EBDITA) 2,907 569 -80.4% 4,910 592 -87.9%
EBDITA margin (%) 15.4% 3.0%   13.9% 1.7%  
Other income 99 400 304.0% 184 857 365.8%
Interest (net) 465 197 -57.6% 849 443 -47.8%
Depreciation 672 644 -4.2% 1,293 1,283 -0.8%
Profit before tax 1,869 128 -93.2% 2,952 (277)  
Tax 63 3,888 6071.4% 424 (213)  
Forex loss/(gain) 1,577 (2,624)   1,826 (506)  
Extraordinary items - 8,067   895 (1,121)  
Profit after tax/(loss) 229 6,931 2926.6% 1,597 (679)  
Net profit margin (%) 1.2% 36.9%   4.5% -2.0%  
No. of shares (m)       373.2 420.4  
Diluted earnings per share (Rs)*         (0.0)  
* excluding extraordinary items

What has drive performance in 2QCY09?
  • Ranbaxy’s revenues declined by 1% YoY in rupee terms during 2QCY09 largely due to fall in revenues in North America, Europe, CIS and Latin America. Revenues from the US plunged 41% YoY (in dollar terms) during the quarter mainly due to the ongoing issues with the US FDA which adversely impacted sales in this region. Ranbaxy has prepared a corrective action plan in line with the requirements of the US FDA and is awaiting the US FDA’s response on this matter, which the company expects to happen anytime soon. Despite its troubles, the management is confident of launching its products especially the FTFs on time beginning with ‘Valtrex’ at the end of this year. Revenues from Canada grew by 10% YoY during the quarter restricting the fall of the company’s revenues from North America to 35% YoY.

  • Europe put up a poor show during the quarter with revenues declining by 12% YoY (in dollar terms). The de-growth was largely on account of the Romanian market (down 11% YoY), which experienced difficult market conditions owing to price regulation changes and factors such as currency devaluation and channel destocking which affected demand. Revenues from the top markets of Western Europe namely UK, France and Germany managed to report growth in revenues although the company has not divulged the extent of the same.

  • Revenues from the domestic market (excluding global consumer healthcare) clocked a 21% YoY growth during the quarter. The company maintained its second position in the market with a share of 4.9% and launched 28 new products. The company also entered into an agreement with Ochoa Laboratories, India for the acquisition of its brands in dermatology and pain management. Ranbaxy’s Global Consumer Healthcare business recorded a growth of 14% YoY during the quarter on account of all its key brands registering strong sales. While the company’s flagship brand ‘Revital’ maintained its market share at 87% that for ‘Volini’ increased to 32.5%.

  • Sales from CIS (including Russia) fell by 30% YoY due to currency depreciation, weak demand, de-stocking at various levels and prudent credit management in the country given tight liquidity conditions in the market. Africa reported an impressive 23% YoY growth in revenues due to buoyant sales in the South African market. In Latin America, sales dipped by 3% largely on account of a 5% YoY decline in sales from Brazil. The sales in Brazil were lower primarily due to non-repetition of a tender business, excluding which sales reported an 11% YoY growth. While Mexico grew by 17% YoY, the rest of the Latin American market de-grew by 4% YoY. The Asia Pacific region (excluding India) recorded a 3% YoY growth led by some key markets including Malaysia, China, Australia and New Zealand.

  • Operating margins collapsed during the quarter to 3% with profits plunging by a massive 80% YoY. This was largely due to the fall in revenues against a backdrop of a substantial rise in raw material and staff costs. The company had a forex gain of Rs 2.6 bn in 2QCY09 as against a loss of Rs 1.6 bn in 2QCY08. Further, there was an extraordinary item of Rs 8 bn during the quarter, which was a reversal of the forex loss booked in 1QCY09 due to the appreciation of the rupee. Hence, on excluding the extraordinary item, the company reported a loss at the net level to the tune of Rs 1 bn.

What to expect?
What to expect? At the current price of Rs 279, the stock is trading at a price to earnings multiple of 26.1 times our estimated CY11 earnings. As far as the US FDA issues are concerned, Ranbaxy has prepared a corrective action plan and is awaiting a response from the USFDA after which the next course of action will be decided. As far as the first-to-file opportunities are concerned with respect to the products Valtrex, Flomax, Lipitor and Nexium, for which Ranbaxy has entered into out-of-court settlements, while the company expects the launches to be on track, an element of uncertainty still remains as it was not able to launch Imitrex (for which it had received the 180-day exclusivity) as per schedule on account of a late approval from the US FDA.

Meanwhile, the branded and emerging markets will continue to play a significant role in offsetting the difficult conditions in the developed markets. Going forward, solving the issues with the US FDA will be the key in getting the company’s growth back on track. Uncertainty also persists with respect to the fluctuations in foreign currency which if volatile will have a huge bearing on the performance of the company. The company has a rather subdued outlook for 2009 and expects revenues (in rupee terms) to be marginally lower than in 2008 with a net loss of Rs 8 bn. For this, it has assumed an exchange rate of Rs 50 per US$ and no further impact on account of the USFDA. Given the management issues and the severe problems that the company is facing in the US generics market, we believe investors would do well to stay away from Ranbaxy.

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