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Ranbaxy: Lipitor for the weak hearted? - Views on News from Equitymaster

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Ranbaxy: Lipitor for the weak hearted?

Oct 14, 2005

Ranbaxy has been in the news for the past six months on account of its challenge to Pfizer's blockbuster drug 'Lipitor' in the UK as well as the US. In this article, we take a look why this patent challenge is regarded as the 'mother of all patent challenges' in the global pharmaceutical industry and what has been the verdict so far. About Ranbaxy
Ranbaxy is the largest pharmaceutical company in India. Its annual sales crossed US$ 1 bn in the year 2004. It manufactures and markets branded generic pharmaceuticals products and Active Pharmaceutical Ingredients (APIs). The continued focus on R&D has resulted in several approvals in developed markets and significant progress in New Drug Discovery Research. It invested 6% of revenues in R&D during CY04.

Ranbaxy's continued focus on European and US markets has helped it build deep product pipelines in both the markets. The company has about 151 ANDA filings out of which 99 have been approved by USFDA and 52 are awaiting approval. The company sells products in over 70 countries and has an expanding international portfolio of affiliates, joint ventures and alliances, ground operations in 44 countries and manufacturing operations in 7 countries.

About Pfizer Inc, USA
Pfizer Inc is the world's largest pharma company with revenues to the tune of US$ 52.5 bn and net profits of US$ 11 bn in CY04. The company has a very strong product portfolio with Lipitor, Norvasc, Neurontin, Celebrex and Zoloft being the major drugs. These drugs delivered atleast US$ 2 bn in revenues in 2004. In fact, Lipitor earned the distinction of being the pharmaceutical industry's first US$ 10 bn product. Pfizer Inc invests about 15% of its net revenues in R&D.

Some facts about 'Lipitor'
'Lipitor' (Atorvastatin) belongs to the class of statins, which include Zocor (Simvastatin), Pravachol (Pravastatin) and Lovastatin. These statins are part of the cholesterol reducing class, which is currently the highest therapeutic class in the world with revenues to the tune of US$ 30 bn in CY04.

Pfizer's drug 'Lipitor' has earned the distinction of being the pharmaceutical industry's first US$ 10 bn product garnering revenues to the tune of US$ 12 bn in 2004, which translates to 23% of Pfizer's revenues. The drug held approximately 40% of the worldwide sales in the lipid-lowering market and more than 42% of the US market in total prescriptions. With its ability to bring the vast majority of patients to target cholesterol goals, with an excellent safety profile and proven range of unparalleled cardiovascular benefits, Lipitor has continued to gain wide physician and patient acceptance.

What's in store for Pfizer Inc?
As mentioned earlier, the drug generated revenues to the tune of US$ 12 bn in CY04. Assuming that the drug more or less continues to earn the US$ 12 bn till its patent expiry in 2011, then the total revenues for Pfizer Inc from this drug over the next 6 years will translate into potential revenues of around US$ 72 bn. However, losing the court case in the US will propel the faster entry of generics into the market well before 2011, which means that Pfizer will stand to lose around 6 years of the drug's patent life, resulting in a significant dip in its revenues.

The story so far...
Ranbaxy had the upper hand when it won the patent challenge in Austria. However, the law is different in different countries and the outcome of the decision in one country as such does not have a bearing on the verdicts in other countries. Recently, the UK court dealt a blow to Ranbaxy when it declared Pfizer's main patent on 'atorvastatin' (brand name 'Lipitor') to be valid. This patent expires in 2011. Ranbaxy managed to invalidate a related patent on the calcium salt of 'atorvastatin', the patent of which will expire in 2010. Assuming that Pfizer wins the appeal hearing as well, Ranbaxy will not be able to launch the drug before 2011.

The US decision, which is the most important of the lot, is expected to come out towards the end of 2005 or latest by early 2006 and could be a much tougher nut to crack for Ranbaxy. The US is extremely significant because Pfizer Inc, generates 80% of Lipitor's worldwide revenues from this region. It must be noted that Ranbaxy has two major hurdles to cross. The first is winning the court decision, which is scheduled to come out towards the end of CY05. In the event of a win for Ranbaxy, Pfizer will definitely file an appeal with a higher court. It must be noted that Ranbaxy will most probably not launch the drug 'at risk' and will wait for the appeal decision. Which means that if all goes well, Ranbaxy could get a 180-day exclusivity period and launch the drug in the US markets in 2007, providing a substantial upside to its revenues. Just to put things into perspective, if Ranbaxy wins the 180 day exclusivity period, then assuming a 50% price erosion and 40% market share, Ranbaxy could generate revenues to the tune of around US$ 800 m in six months.

However, the launch of the generic version is subject to a win in both the case hearings, which is likely to prove to be a very difficult task indeed for Ranbaxy. The fact that the company has lost the UK court battle just proves that challenging patents is an extremely tough and risky proposition on account of rising legal expenses and no corresponding revenues from the same.

What to expect?
At the current price of Rs 454, the stock is trading at a price to earnings multiple of 12.2 times our estimated CY07 earnings. Going forward, considering the fact that Ranbaxy is a truly global company, the US and the European markets will be the key growth drivers for the company. Increased focus on R&D will augur well for the company in the long run in the light of the product patent law with effect from January 1, 2005. With its global presence and strong R&D capabilities, Ranbaxy will look to garner a substantial pie of the generic market in the next 2 to 3 years when a large number of products go off patent.

We anticipate that CY05 will be a dull year for the company with almost no growth in profits. We, however, expect a pick up in CY06 and CY07 led by its generics business in the US. We have not factored potential upside if any from Lipitor in our assumptions. The management remains steadfast on attaining US$ 2 bn revenues by CY07. We believe this is largely achievable. We had recommended a HOLD on the stock in September 2005 over a 3 year investment horizon. We maintain our view.


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