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Ranbaxy: US’ dampening effect!
Jul 29, 2005

Performance summary
Ranbaxy Laboratories, India’s largest domestic pharma company, continued with its subdued performance in the second quarter ending June 2005. While topline of the company saw a marginal growth owing to depressed performance in the US region, increased R&D spend resulted in shrinkage of operating margins and consequently the bottomline.

Financial performance: A snapshot
(Rs m) 2QCY04 2QCY05 Change 1HCY04 2HCY05 Change
Net sales 12,992 13,642 5.0% 26,462 25,477 -3.7%
Expenditure 10,065 11,920 18.4% 20,488 22,480 9.7%
Operating profit (EBDITA) 2,927 1,722 -41.2% 5,974 2,997 -49.8%
EBIDTA margin (%) 22.5% 12.6%   22.6% 11.8%  
Other income 275 85 -69.1% 330 116 -64.8%
Interest (net) 126 170 34.9% 233 308 32.2%
Depreciation 415 374 -9.9% 816 700 -14.2%
Profit before tax 2,661 1,263 -52.5% 5,255 2,105 -59.9%
Tax 700 247 -64.7% 1,385 378 -72.7%
Minority interest 3 3   6 6  
Profit after tax/(loss) 1958 1013 -48.3% 3864 1721 -55.5%
Net profit margin (%) 15.1% 7.4%   14.6% 6.8%  
No. of shares (m) 185.5 370.9   185.5 370.9  
Diluted earnings per share (Rs)*       20.8 9.3  
Price to earnings ratio (x)         50.3  
(* annualised)            

What is the company’s business?
Ranbaxy is the largest pharmaceutical company in India. Its annual sales crossed US$ 1 bn in the year 2004. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). The continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. Its foray into Novel Drug Delivery Systems has led to proprietary 'platform technologies' resulting in a number of products under development, with one product Cipro OD in market. It invested 6% of revenues in R&D during CY04.

Ranbaxy's continued focus on European and US markets has helped it build deep product pipelines in both the markets. The company has about 151 ANDA filings out of which 99 have been approved by USFDA and 52 are awaiting approval. The company sells products in over 70 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 44 countries and manufacturing operations in 7 countries.

What has driven performance in 2QCY05?
US: ‘Quinapril’ woes continue
US, which accounts for over 35% of the company’s consolidated revenues, reported a significant 11% YoY decline in 2QCY05 revenues. The geography continued to remain soft and witnessed intense competition resulting in price erosion. It must be noted that in the previous quarter (1QCY05), the company had to discontinue sales of its generic product, ‘Quinapril’, to Teva (Israel) and take back unsold stocks from it. This was owing to a US court decision, which stopped Teva and Ranbaxy from selling the generic version in the US. ‘Quinapril’ remained off the market in this quarter too, consequently affecting YoY revenues in the US market. The company has appealed against this judgment and the appeal hearing is scheduled in the first week of August 2005.

The only silver lining in this dark cloud, however, was the fact that Ranbaxy’s total prescription growth in this region increased by 26% during the quarter, beating the industry growth of 16%. Accordingly, the company’s ranking improved by 2 positions to 12th. The total cumulative product filings now stand at 152, with 50 pending approvals. The pipeline of the company is one of the largest in the US market, which indicates the potential growth prospect from this region in the form of new drug launches.

Europe: Aiming to increase presence
The European region (approx. 17% of total revenues) clocked a 27% YoY growth during the quarter. The key markets of UK, France and Germany combined, now constitute 69% of the total EU sales at US$ 37 m. The company intends to gain a strong foothold in the European markets. With this aim in mind, it recently acquired a generic product portfolio of 18 products from the Spanish pharmaceutical company EFARMES, S.A. Unipersonal with a view to establish a presence in Spain. Also, the company has entered into an in-licensing agreement with the Indian company, J.B.Chemicals, to market their key herbal range brand, Doktor Mom, in the Romanian market.

India: Staging a recovery
After VAT and MRP based excise related concerns dented the performance of the company in the previous quarter, the company recovered in 2QCY05 and posted a 21% YoY growth in the domestic market on the back of a strong performance by the chronic therapy portfolio. The share of the chronic therapy portfolio has increased to 21.8% of domestic revenues (up from 18.8% in the corresponding period last year). Within this, the company’s CVD (cardiovascular plus diabetes) folio grew by 22% as against 5.2% industry growth. The anti-infective NDDS products registered a growth of 5% as compared to the market growth of -3.3%.

Margin pressure affects profitability:  Operating margins registered a steep decline in 2QCY05 collapsing by almost 10% (990 basis points). The major reason for the decline could be attributed to a huge 99% YoY rise in R&D expenditure. This steep rise in R&D spend was attributed to the company's increase in bio-studies for generic filings and an increased number of product filings worldwide. Increasing competition in the generics space has also led to lower realizations and consequently lower margins. Slower growth in sales and decline in the operating margins has been reflected in the bottomline which fell by 48% YoY. The bottomline fall was further magnified owing to a sharp fall in other income (down 69% YoY) and a 35% rise in interest expense.

Over the last few quarters
(%) 1QCY04 2QCY04 3QCY04 4QCY04 1QCY05 2QCY05
Net sales growth 17.8% 10.1% 12.2% 18.6% -12.1% 5.0%
Operating profit margin 23.7% 23.7% 23.0% 15.4% 10.8% 12.6%
Net profit growth 9.8% -4.7% 7.1% -10.8% -62.9% -48.3%

What to expect?
At the current price of Rs 467, the stock is trading at a price to earnings multiple of 16.3 times our estimated CY06 earnings. Going forward, considering the fact that Ranbaxy is a truly global company, the US and the European markets will be the key growth drivers for the company. Increased focus on R&D will augur well for the company in the long run in the light of the product patent law with effect from January 1, 2005. With its global presence and strong R&D capabilities, Ranbaxy will look to garner a substantial pie of the generic market in the next 2 to 3 years when a large number of products go off patent.

We anticipate that CY05 will be a dull year for the company with almost no growth in profits. We, however, expect a pick up in CY06 and CY07 led by its generics business in the US. The management remains steadfast on attaining US$ 2 bn revenues by CY07. We believe this is largely achievable. Consequently, we remain positive on the company from a long-term perspective.

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