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Ranbaxy VS Dr. Reddy's: Clash of the titans! - Views on News from Equitymaster

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Ranbaxy VS Dr. Reddy's: Clash of the titans!

Oct 5, 2005

Domestic pharma heavyweights, Ranbaxy and Dr.Reddy's have been the pioneers in establishing a global presence and moving ahead of competition in new drug discovery in the domestic pharma industry. While both the companies have similar business models (in respect of focus on generics and new drug discovery), we take a look at how these companies compare against each other on certain parameters.

Financial comparison
(Rs m) Ranbaxy (CY04) Dr.Reddy's (FY05)
Net sales 52,451 18,359
Sales growth (4 year CAGR) 25.5% 4.0%
Operating profit 10,005 784
Operating profit margin (%) 18.4% 4.3%
Net profit 6,986 330
Net profit margin (%) 12.8% 1.8%
Net profit growth (4 year CAGR) 70.6% -61.4%

How do they compare?

Revenues: Both Dr.Reddy's and Ranbaxy have aimed to establish a global footprint over the years. Also as far as international markets are concerned, both these companies have been focusing on the generic markets of the US and Europe as well as the semi-regulated markets of Russia, CIS and others. However, the similarity ends there. While US is the major growth driver for Ranbaxy contributing around 36% to total revenues (CY04), the contribution from this region to Dr.Reddy's revenues is only 16% (FY05). Having said that, lately the US region has dampened the revenues of both Ranbaxy (marginal 2% YoY growth in CY04) and Dr.Reddy's (down 28% YoY in FY05) on account of intense competition and severe price erosion.

The geographical contribution to revenues has been different for both these companies. Indian markets are higher on Dr.Reddy's radar, which can be gauged by the fact that this region contributes 41% to its total revenues as compared to only 22% contribution to Ranbaxy's revenues. However, in absolute terms, Ranbaxy is ahead of Dr.Reddy's with Rs 8 bn in revenues from the domestic market as compared to the latter's revenues of Rs 7 bn, which suggests the fact that Ranbaxy has a stronger presence in the Indian pharma market.

The contribution of exports to Ranbaxy's revenues (about 80%) stands higher than that of Dr. Reddy's (60%). While US has been the key revenue generator for Ranbaxy (regular and more balanced ANDA filings have led to growth), India and the Rest of World (ROW, including CIS, Russia and Brazil) has been the major contributor to Dr.Reddy's revenues. In fact, the 13% YoY growth in ROW revenues (branded formulations has boosted growth) in FY05 was the only silver lining in the cloud for Dr.Reddy's, which witnessed a decline in revenues in all the other regions.

One must also note the fact that as far as the domestic pharma market is concerned, while the negative impact of VAT is already factored into Dr. Reddy's performance, the same will be reflected in Ranbaxy's performance in CY05.

R&D: Both the companies have been pioneers in R&D in India. While Dr. Reddy's R&D spend accounts for 13% of revenues (more or less in line with the global trend), Ranbaxy's spend accounts for 6% of revenues, which it plans to increase steadily to 9% by CY07. The R&D efforts are directed towards new drug discovery research and generics. However, in Dr. Reddy's case, the R&D ratio is a little skewed owing to a drastic fall in revenues in FY05.

As far as ANDA filings are concerned, Ranbaxy's strategy has been more stable than that of Dr. Reddy's. This is due to the fact that Dr. Reddy's has focused more on the highly risky strategy of Para IV filings, with a dismal success rate, the exception being that of 'fluoxetine axetil'. Ranbaxy, on the other hand, has also been focusing on Para II and Para III filings, which has ensured a steady revenue stream to the company.

Operating margins: On the expenditure side, raw material costs (as a percentage of sales) have been lower for Dr. Reddy's. This can be attributed to a higher contribution from exports in Dr. Reddy's case as against Ranbaxy. The higher employee costs in case of Dr. Reddy's can be attributed to the mounting R&D expenditure and also increased activity on the ANDA front (especially Para IV). As far as the US generic market goes, Ranbaxy has a much stronger standing in the region. This is probably why Ranbaxy's selling and administrative expenses are lower compared to Dr. Reddy's. To sum up, rising R&D expenditure coupled with mounting legal costs had severely dented Dr.Reddy's profitability in FY05.

Cost comparison
(% of sales) Ranbaxy (CY04) Dr.Reddy's (FY05)
Raw material costs 35.0% 32.8%
R&D expenditure 6.2% 12.5%
Employee costs 11.7% 16.0%
Selling & administrative costs 28.7% 34.5%

Valuations

Currently, Dr.Reddy's is trading at a premium to Ranbaxy, which can be gauged by the fact that while the former is trading at a price to earnings multiple of 38.1 times our estimated FY08 earnings, Ranbaxy is trading at a price to earnings multiple of 13.1 times our estimated CY07 earnings. It must be noted that Dr.Reddy's lower EPS of 4.3 has led to the artificially high price to earnings multiple. Pricing pressure in the US markets is expected to plague both the companies in the current fiscal as well. However, as far as Dr. Reddy's is concerned, while we believe that the worst for the company is over and it is gradually trudging on the recovery path, the current valuations are rather rich. In the case of Ranbaxy, despite hiccups in CY05, we believe that patent expiries of some major blockbuster drugs will boost its performance in CY06 and CY07.Keeping that in mind, at the current juncture, we prefer Ranbaxy to Dr. Reddy's.


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