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Ranbaxy vs. Dr. Reddy’s: The divergence is apparent - Views on News from Equitymaster
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  • Aug 16, 2000

    Ranbaxy vs. Dr. Reddy’s: The divergence is apparent

    Dr. Reddy’s Laboratories and Ranbaxy are the two premier Indian pharmaceutical companies. Both have been pioneers in reverse engineering in the past, both the companies were among the first to reap the benefits of research, both the companies were also among the first to go beyond the shores of India.

    While Ranbaxy became the first company to license a new once–a–day dosage form of ciprofloxacin to Bayer (Novel Drug Discovery System), Dr. Reddy was the first to licence a New Chemical Entity (NCE)–an anti–diabetes molecule to Novo Nordisk of Denmark.

    However, the stock price movements of the two companies, over the past nine months, couldn’t have been more divergent. In October 1999 while Dr. Reddy’s ruled at Rs 1,475, Ranbaxy ruled at around Rs 1,200. Nine months later while Dr. Reddy’s rules at Rs 1,087, Ranbaxy has come off to Rs 570.

    One reason for the divergence, over this time period, could be the financial performance of the two companies. (While Ranbaxy showed a 20% drop in the pre–tax profits in the second quarter, Dr. Reddy’s reported an over 100% jump during the second quarter.) The second reason could be the merger of Cheminor and American Remedies with Dr. Reddy’s, which gives the latter a respectable size without too much equity dilution.

    However, the fact remains that stock prices are more of the perception of the company’s future than their past performance. Both the companies have announced that they are working on new molecules. Ranbaxy had announced almost six months back that they are working on a BPH (benign prostrate hyperplasia) compound while Dr. Reddy’s has been working on its second anti–diabetes molecule.

    The prospects for the anti–diabetes molecule seem to be much better as the size of the market is much bigger (at around $ 10 bn) versus the size of a $ 2 bn market for BPH. Apart from the fact that the incidence of the disease (diabetes) is higher, the fact remains that, so far, there is no surgical alternative for diabetes (surgery can treat BPH).

      Dr. Reddy Ranbaxy
    CMP 1,087 570
    Revenues (E) 8,658 17,837
    Mcap 34,240 66,063
    Mcap/Revenues 4.0 3.7
    EV/EBITDA 25.2 22.2

    the revenue figures for Dr. Reddy's includes Cheminor's numbers

    It is quite possible that the market is taking into account the scale of revenues that could accrue to each of the companies from the successful outcome of their research while valuing the two stocks. This is not to say that there is a dramatic undervaluation in either of these stocks. It’s just that over the last nine months the valuations of Dr. Reddy’s seem to have caught up with those of Ranbaxy.



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