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Ranbaxy: Forex losses hurt profits

Jul 29, 2008

Performance summary
  • Revenues grow by 14% YoY in 2QCY08, driven by strong performances in the US, Latin America and Africa.

  • EBIDTA margins expand by 3.5%, largely due a significant reduction in raw material costs (as percentage of sales).

  • PAT tumbles by 91% YoY, led by forex losses of Rs 1.9 bn as compared to gains of Rs 2 bn in the corresponding quarter last year. Excluding the impact of both, net profits grow by a robust 73% YoY.

  • Enters into an agreement with Pfizer to settle most of the litigation worldwide with respect to the latter’s cholesterol reducing drug ‘Lipitor’, which is the largest selling drug in the world with revenues of US$ 12.7 bn.

  • Ranbaxy’s promoters sell their stake (around 35%) to the Japanese pharma company Daiichi Sankyo at a price of Rs 737 per share.

Financial performance: A snapshot
(Rs m) 2QCY07 2QCY08 Change 1HCY07 1HCY08 Change
Net sales 16,853 19,286 14.4% 32,674 36,272 11.0%
Expenditure 14,588 16,025 9.9% 28,501 30,459 6.9%
Operating profit (EBDITA) 2,265 3,261 44.0% 4,173 5,813 39.3%
EBIDTA margin (%) 13.4% 16.9%   12.8% 16.0%  
Other income 2,051 (1,832)   2,655 (2,545)  
Interest (net) 351 465 32.5% 664 849 27.9%
Depreciation 565 672 18.9% 1,122 1,293 15.2%
Profit before tax 3,400 292 -91.4% 5,042 1,126 -77.7%
Tax 738 63 -91.5% 1,093 424 -61.2%
Extraordinary items - -   - 895  
Profit after tax/(loss) 2,662 229 -91.4% 3,949 1,597 -59.6%
Net profit margin (%) 15.8% 1.2%   12.1% 4.4%  
No. of shares (m) 372.8 373.2   372.8 373.2  
Diluted earnings per share (Rs)*         14.9  
Price to earnings ratio (x)*         31.7  
(*on a trailing 12-months basis)

What has driven performance in 2QCY08?
  • Revenues from the US registered a strong 12% YoY growth (in dollar terms) during 2QCY08, which was led by new product launches, continuing volume growth across generics, branded generics and OTC segments. In the branded generics segment, the company’s key brand ‘Sotret’ remained the leader in its respective product category with 53% market share. Besides this, the dermatology portfolio, which Ranbaxy re-launched post acquisition from Bristol Myers Squibb, also contributed to the growth of the branded generics business. The overall market share of Ranbaxy in the US generics market (in the molecules in which it is present) during the second quarter stood at 10.3%. Ranbaxy’s cumulative ANDA filings now stand at 239 with 146 product approvals.

  • Ranbaxy has entered into an agreement with Pfizer to settle the litigation worldwide for the latter’s cholesterol-reducing drug ‘Lipitor’. This agreement will enable Ranbaxy to launch the drug with a 180-day exclusivity under a license from Pfizer from November 30, 2011. This agreement also extends to Pfizer’s product ‘Caduet’, which is a combination of ‘Lipitor’ and ‘Norvasc’. Besides this, the settlement will also resolve additional patent litigation between the two companies for the drug ‘Accupril’.

  • The European region had a dismal quarter with revenues growing by a mere 3.5% YoY (in dollar terms). While France did well reporting an 11% YoY growth in revenues backed by 2 product launches, revenues from the UK and Germany declined by 22% and 30% respectively. The UK market continued to remain highly competitive and revenues from Germany were impacted due to the high base effect last year due to business accruing from previous AOK (an insurance company) contracts. Sales from Romania grew by a staid 5% YoY and was attributed to uncertainty prevailing in the market due to the proposed healthcare reforms and the re-introduction of branded prescribing, which has been introduced from April 1, 2008.

    Geographical snapshot
    (US$ m) 2QCY07 2QCY08 Change
    India & Middle East 78 91 16.7%
    CIS (Russia and Ukraine belt) 18 24 33.3%
    Rest of Asia Pacific 18 25 38.9%
    Asia Pacific total 114 140 22.8%
    North America (US & Canada) 91 110 20.9%
    Europe (including Romania) 93 83 -10.8%
    Africa 24 31 29.2%
    Latin America 9 16 77.8%
    Sub total 331 380 14.8%
    APIs 23 30 30.4%
    Net sales 354 410 15.8%

  • Revenues from the domestic market clocked an unenthusing 3% YoY growth (in dollar terms) during the quarter and were impacted by pileup of inventories. However, the company expects revenues from India to improve going forward. The company launched 26 new products and garnered a market share of 5.28% as per the latest IMS data. The contribution of the chronic therapy segment stood at 24.7% to sales in the quarter ended May 2008 as against 24.2% in the corresponding period last year. The chronic portfolio grew by 21% as against the market growth rate of 20%. Ranbaxy’s Global Consumer Healthcare business recorded a 36% YoY growth in sales led by the strong performance of the company’s flagship brand ‘Revital’, which increased its market share to 83.9%.

  • While CIS grew by 44% YoY, Africa reported flat growth in revenues. Brazil posted a healthy 45% YoY growth during the quarter and was influenced by the overall buoyant growth of the Brazilian generics market. Japan also contributed by posting a healthy 88% YoY growth during the quarter and was bolstered by the pro-generic reforms introduced by the government effective 1QCY08. The company launched ‘Amlodipine’ in Japan during the quarter, which has a market size of US$ 2 bn in Japan as per the IMS-MAT data for December 2007.

  • Operating margins improved significantly by 3.5% largely due to the reduction in raw material costs (as percentage of sales). Despite the robust 44% YoY growth in operating profits, the bottomline tumbled by 91% YoY. This was attributed to the huge forex losses of Rs 1.9 bn that Ranbaxy incurred during the quarter as against considerable forex gains of Rs 2 bn in 2QCY07. Having said that, if one were to exclude the forex impact and the tax thereon, net profits clocked a strong 73% YoY growth.

What to expect?
At the current price of Rs 473, the stock is trading at a multiple of 14.3 times our estimated CY10 earnings. Against a backdrop of severe pricing pressure in the US generics market, Ranbaxy has adopted the strategy of increasing its product flow and widening its geographical reach. As far as Para IV filings are concerned, the company has been entering into settlement agreements that will provide some semblance of certainty in terms of product launches going forward. For instance, Ranbaxy is sure of getting the exclusivity period for the blockbuster drugs ‘Imitrex’ in CY08, ‘Valtrex’ in CY09, ‘Flomax’ and ‘Lipitor’ in CY10. The settlement deal signed with AstraZeneca for the latter’s US$ 5.5bn drug ‘Nexium’ is an added feather in Ranbaxy’s cap.

Besides this, we believe its focus on the branded and emerging markets will play a significant role in offsetting the difficult conditions in the developed markets thereby bolstering its overall performance. While regulatory changes in various countries are a key risk that could impact performance going forward, Ranbaxy is countering the same by increasing its geographical reach worldwide. The company has identified biotech as an important opportunity as is evinced by the stakes it has bought in three biotech companies in India. While this is a step in the right direction, it will be a while before revenues from this field make any significant contribution.

Investors should note that we had factored in the sale of the R&D unit in our estimates and thus in light of these new developments, we will have to have a look at our numbers. Plus, we will have to factor in the Daiichi Sankyo deal in our estimates.

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