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Ranbaxy: Conference call extracts - Views on News from Equitymaster
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Ranbaxy: Conference call extracts
Aug 4, 2006

Ranbaxy’s management held a conference call post the declaration of their 2QCY06 results to discuss the company’s performance and its growth prospects going forward. Here are the key takeaways from the same. Pricing pressure and the US market: Pricing pressure in the US market have shown no signs of abating. That said, prices in 1HCY06 have not fallen as drastically as the fall witnessed in CY05. The market has been highly competitive with new players foraying into new as well as existing molecules. Ranbaxy expects the US market to remain competitive and pricing pressure to continue going forward. The company is concentrating on boosting volumes in the US market. With this objective in mind, it has been increasing its customer focus and new chain listings. Ranbaxy received the 180-day exclusivity for ‘Simvastatin 80 mg’ in June 2006 and has managed to capture more than 50% of the market for the same.

Product launches in the US market: The company has about 169 ANDA filings out of which 113 have been approved by the US FDA and 56 are awaiting approval. While the US FDA warning is likely to slow down product launches from the Paonta Sahib plant, the company maintains that out of 56 ANDAs pending approval, 75% will be launched between CY07 and CY08.

Warning letter from the US FDA: Ranbaxy has received a warning letter from the US FDA due to the fact that the former’s manufacturing facility at Paonta Sahib, Himachal Pradesh had not adhered to the Good Manufacturing Practices norms. Ranbaxy is currently in the process of addressing the concerns raised by the US FDA. This has also delayed the approval of ‘Pravastatin 80 mg’ for which the company is expecting to receive the 180-day exclusivity period.

European strategy: After the US, Europe is the next important market for Ranbaxy. The company is planning to establish a strong presence in this market through acquisitions and new product launches. That said, the company’s performance has been affected in 1HCY06 due to various healthcare reforms undertaken in Germany and France. In Germany, the new drug law passed has made a 30% price differential between branded drugs and their generic versions mandatory. While this is expected to affect companies in the higher end of the German market (in terms of pricing), the impact is not likely to be that significant for companies such as Ranbaxy, which competes in the lower end of the market. That said, the next few quarters will give a clearer picture of how this law will pan out in Germany.

In France, Ranbaxy expects its operations to turn EBIDTA positive in CY06 by stepping up its product launches and also working on achieving reduction in material costs by sourcing from India. The company is facing severe pricing pressures in the UK market and is looking to counter the same by strengthening its product pipeline.

China and Brazil: As in Europe, regulatory changes have taken place in these two countries as well. In China, changes are taking place with respect to how products are to be sold to hospitals and agencies and has therefore affected the company’s performance during the quarter. These issues are likely to be addressed in 2HCY06. In Brazil, due to regulatory changes, Ranbaxy has had to re-register and re-file its products, consequently denting performance.

Acquisition strategy: Besides organic growth, Ranbaxy has outlined acquisitions as part of its strategy to further growth going forward. The company has already made four acquisitions in the European markets viz., Romania, Italy, Belgium and Spain with the largest of the four being the acquisition of the Romanian company Terapia for US$ 324 m. The company is also open to acquisition opportunities in the US and India. While the rationale for a US acquisition is to gain in scale, for the European markets the motive is to increase geographical reach. As far as Terapia is concerned, growth will be higher than the overall market growth in Romania.

India and the DPCO: Ranbaxy has a strong presence in the Indian market with a market share of 5%. Here, the company plans to drive growth by focusing on the chronic therapy segment, which has seen an increase in contribution from 21% in 1HCY05 to 23% in 1HCY06. In-licensing is another strategy that the company has adopted to keep up the pace of product launches in the domestic market. With regards the DPCO, the company maintains that the pharma industry is united in its stand against price control and that the current status quo (i.e., 74 drugs under price control as opposed to 354 as per the proposed policy) is the preferred option. Ranbaxy has stated that they do not see the proposed policy going through in its proposed form.

Guidance for the future: Ranbaxy’s management expects revenue growth for CY06 to be above 18% YoY and its margins to expand above 16%. The company also maintains its stand of achieving US$ 2 bn in revenues by CY07. Growth is likely to be driven by key geographies and also likely further acquisitions. As per our assumptions, we believe that Ranbaxy will achieve around US$ 1.7 bn in revenues by CY07. This excludes any further acquisitions that the company might make.

What to expect?
At the current price of Rs 396, the stock is trading at a price to earnings multiple of 16.3 times our estimated CY08 earnings. Going forward, Ranbaxy’s performance is expected to improve, as contribution from acquisitions will start to filter in. While pricing pressure in the US is expected to continue in the near future atleast, the company is planning to counter the same on the back of an increased product flow. The 180-day exclusivity for ‘Simvastatin’ 80 mg has been a major gain for Ranbaxy and the impact of the same will be reflected in 2HCY06. In addition, the company is undertaking several cost cutting initiatives in a bid to spruce up margins. That said, the sorting of issues with the US FDA would be a key development to watch out for. We maintain our positive view on the company from a long-term perspective.

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