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Analyst meets extracts: Ranbaxy - Views on News from Equitymaster
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Analyst meets extracts: Ranbaxy
Sep 10, 2004

Ranbaxy is India's largest pharma company. Though anti-infectives remain its core business, it has forayed into different therapeutic segments with new product launches in CVS (cardiovascular) and CNS (neurology) segments. Ranbaxy's R&D thrust has resulted in the company having the most enviable R&D pipeline in the country. It is one of the pioneers in basic pharma research in the country. Moreover, its foray into Novel Drug Delivery Systems has also helped it reap rich dividends. In the analyst meet yesterday, Ranbaxy shared its views on the Indian and global pharmaceutical industry and the company's strategy going forward.

Generics potential
  • Ranbaxy has become 9th largest generics company in the world. The growth has been basically driven by the strong show of the company in US and European markets. The company has about 87 products in the US and the portfolio in Europe is increasing at a very fast rate.

  • The supply of new molecules has slowed down in recent years and the burgeoning health cost has prompted governments in developed countries to incentivise the use of generic drugs. The generics market has sales of about US$ 26.5 bn in the US and is likely to grow to US$ 60 bn by 2008 (this figure takes into account the price fall and increased usage). Apart from this, in European countries, the penetration of generics is very low and they offer a huge opportunity.

      Market size (US$ bn) Generics penetration
    Germany 27.6 21.1%
    France 25.4 2.9%
    Italy 17.4 0.5%
    UK 17.1 10.6%
    Spain 12.6 3.2%

  • The basic advantage of Ranbaxy is its focus on new product launches, strengthening its relationship with large distributors and cost advantages as an Indian player. The company believes that a strong distributor relationship is a significant entry barrier in the generic market. With almost 87 products in the US and 40 pending approvals, the company has done the groundwork to expand at a faster rate. The cost efficiencies are also derived from the company's presence across entire value chain of the pharma sector.

  • In Europe too, it has presence in the top three markets (Germany, France and the UK). The acquisition of RPG Aventis has strengthened the company's presence in France. Although, it does not have a significant presence in Germany, the company is open to inorganic growth opportunities.

  • In Russia and Brazil too, the company has established its ground presence and we expect growth to accelerate in the future.

R&D activities
  • On the R&D front, the company has made significant progress in the NDDS segment (novel drug delivery system). While the company's on the ANDA front over the years has been impressive (almost 127 ANDA's have been filed in the US and Europe as of 1HCY04), the NDDS investments are yet to contribute to the company's revenues in a meaningful way. However, we expect the contribution to increase over the medium-term.

  • Apart from investments in ANDA's and NDDS, the company will increase focus in NCE (new chemical entities). The share of R&D spend will go up faster in NCE's than in other two activities.

  • The company plans to increase R&D expenditure by about 1% of sales every year. It means that the R&D expenditure as percentage of sales will touch 10% levels by the year 2007 (6% of sales currently).

Ranbaxy has continuously gained strength in the generics market in the US and is using that experience to garner significant market share in Europe. While it may take time for some projects to yield results, the company is moving in the right direction. The large generics potential and NDDS market will be the growth driver in next two to three years. The year 2006 is likely to be an eventful year, as we expect molecules worth US$ 23 bn to go off patent. Ranbaxy has strong capabilities to manufacture and market these drugs, which includes Simvastatin and Pravastatin.

At Rs 998, the stock is trading at a price to earnings multiple of 21 times CY04 expected earnings. We had recommended this stock as a 'BUY' in August 2004 with a target price of Rs 1,300 over the next two to three year period. We maintain this view on Ranbaxy.

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